High level of optimism (Daily analysis 26.05.2020)

26 May 2020 14:30|Bartosz Grejner

Strong increases in the markets and the depreciation of the dollar contributed to a clear zloty's appreciation. The climate of German consumers improved in May, but it is still closer to historically low levels than levels observed before the pandemic.

EUR/USD again close to 1.10

Tuesday was marked with the continuation of positive sentiment in the world. Optimism comes from the re-opening of economies, basically all over the world. This is supported by the lack of negative information, which could significantly worsen this good sentiment. There is tightening rhetoric between the US and China, but the market is treating this verbal war as a fear locked in the closet - it will probably threaten, but it is something to worry about later.

As a result of a strong increase in the risk appetite, the main market indexes gained, among others, and the dollar lost on the global market. The quotations gained about 0.5% at midday, increasing again close to 1.10 (max. about 1.0974). The US currency also lost about 1% against the pound, the Australian and New Zealand dollars and the Norwegian krone, among others.

At its weakest rate since mid-March

The strong change in sentiment towards the currencies of emerging countries (EM) is well illustrated by the Bloomberg dollar index, which also includes their currencies. Today, it fell to 1235 points, the lowest level since mid-March. An increase in economic activity (or at least the optimism connected with it) will naturally trigger an increase in demand for the currencies of emerging countries.

The pace of growth of this optimism seems problematic at the moment, practically unaffected by the Hong Kong problem. This could potentially predict a worsening of sentiment, especially as there is not yet much data on the effects of the opening of economies and how consumer demand is developing, on which the path to recovery depends most.

Improving sentiment in Germany

According to GfK's monthly report, the German consumer climate increased in May compared to April. The index reading of -18.9 pts. is 0.9 pts. lower than expected, but it shows progress compared to the previous month when it reached its lowest level since at least 2005 (beginning of the survey) at -23.1 points.

All the components of GfK's climate index have increased: expectations about the state of the economy, willingness to buy or expected income. However, these are increases from very low levels and still very far from pre-pandemic figures. The gradual opening of the German economy as early as April, together with the huge scale of aid programmes, are helping to improve the sentiment, but as GfK notes, the impact is uneven. The income of many freelancers from the cultural sector, among others, is still zero.

This example also illustrates the wider problem most economies are likely to face: the uneven impact of the pandemic on society and the different sectors of the economy, which may hinder a rapid return of countries' GDP to the levels before the imposition of restrictions (currently foreseen for most of them at the end of 2021 or 2022).

The zloty is strong, as are other EM currencies

These are issues that may be more relevant in the coming months (as well as the Hong Kong issue, US-China relations, US elections). Currently, a strong increase in optimism and a weaker dollar result in an equally strong increase in demand for emerging countries' currencies, including the zloty. The EUR/PLN quotations surpassed 4.50 and fell for good to around 4.45, i.e. to the lowest level since mid-April (similar to the aforementioned dollar index).

The dollar reacted most strongly from the main currencies, losing about 1.5% to the zloty, while the USD/PLN exchange rate fell to 4.06. It should be remembered, however, that the current growth of global demand is primarily due to increased expectations (and optimism about lifting restrictions), not to a stronger than expected improvement in the condition of economies. Although an increased appetite for risk may still remain as the market in its current state looks beyond the pandemic stage, it has a potentially fragile background.


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

See also:

25 May 2020 17:59

Positive sentiment at risk (Afternoon analysis 25.05.2020)

25 May 2020 14:19

German companies with optimism for the future (Daily analysis 25.05.2020)

22 May 2020 17:02

Limited changes, but uncertainty remains (Afternoon analysis 22.05.2020)

22 May 2020 13:21

Geopolitical tensions increase (Daily analysis 22.05.2020)

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