Illusive sense of peace (Daily analysis 06.02.2018)

A panic sell-off on the share market caused depreciations on the US markets that hadn't been seen for 6 years. The risk aversion on currency has also increased, but at a much smaller level than on share markets. The EUR/PLN pair was quoted between 4.15-4.16 in the morning. Risks to the emerging countries currencies, including the zloty, may rapidly accumulate.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• No macro data that clearly influences the analysed currency pairs.

The session will make history

Yesterday, the macroeconomic data from the US had no impact. Despite an increase in the ISM service index to the highest levels in over 12 years and a positive impact from key components (new orders, employment) the US indexes depreciated hourly. At the end of the session, however, there was a panic sell-off, which is very rare.

The Dow Jones index depreciation even reached over 6%. It was significant at the end of the session when taking into account the historical quotations. The index fell 1175 points at the close and was the biggest on record. Moreover, interest losses on the US market were the deepest in 6 years.

We cannot define concrete info that caused such a strong overpricing. The collapse of the market with a lack of reaction from demand and action in the automated trading system resulted in a situation that within two minutes there was a more than 2% decline in the world's largest exchange market.

Yesterday, the third downward session on the US market was observed. In the other two, the bond market response was very limited, but yesterday’s and this morning’s yields on US Treasury bonds maturing in 10 years fell by 20 base points. On one hand, this means a reduction in the expectations of future interest rates. On the other hand, it may suggest a wider flow of capital from the share to the bonds market, which is not particularly beneficial for the global sentiment.

The movement shift from shares and bonds to currencies is still very limited. That being said, the Swiss franc and the Japanese yen strengthened and these movements were not particularly significant. Moreover, the franc also lost a significant part of the profit gained during today's European trade. It seems that global investors may still perceive the US depreciation as a temporary event that is neither likely to stop the upward trend nor global economic growth. As a result, this should not lead to capital outflows from emerging markets to home countries. Therefore, the lack of foreign capital withdrawal limits movements in currencies.

However, this market confidence can be very illusory and similar to the illusory approach where the risk of falling deeper on stock exchanges is close to zero. A prolonged period of weak sentiment may translate into a very sharp weakening of EM currencies. When foreign capital starts to 'rescue' the profits made in emerging economies, then the drop in EM currencies may be huge. It is almost impossible to precisely determine this moment, but in recent hours, the risk of fulfilling this negative scenario has increased significantly.

Risk will not omit the zloty

The risks listed above also relate to the zloty. The zloty is not insensitive to global changes. Any significant capital outflow from emerging markets can rapidly translate into the zloty's depreciation. There is no reason to believe that the zloty will be omitted in the case of significant changes if there is a strong outflow of capital from Asia, Latin America or countries in our region.

Investors will likely to pay attention to further quotations on the global market. The maintained negative sentiment significantly increases the risk of the zloty being depreciated, which in the case of some currencies (e.g. the franc or the dollar), it could even exceed several grosz. The cooling down on the market would reduce risks for the PLN, but it seems that the period of very calm currency trading (despite limited changes) will probably not return quickly.