Improvement in sentiment supports the zloty (Daily analysis 4.02.2020)

Strong data from the USA and Europe support positive sentiment and a greater appetite for risky assets for the second day in a row. The zloty benefits from the current situation and pares some of the losses incurred: the EUR/PLN drops below 4.28, the lowest level since last Wednesday.

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

• 4:00 p.m.: Orders for machinery in the USA in December (estimates: +1.2% month-on-month).

The positive sentiment observed on Monday translated into today's quotations. The main market indexes in Europe gained slightly over 1% around midday, with simultaneous depreciation of the yen, the franc or gold. Tuesday's quotations, at least until midday, were characterized by a reduced level of risk aversion. This is a consequence of slightly better-than-expected data received yesterday from the eurozone (PMI), as well as much higher-than-consensus activity indexes in the US industrial sector.

So far the market is not concerned with the virus

Despite reports from the largest media agencies about the rising number of victims of the virus from China, market sentiment indicates that the worst-case scenario of a strong spread and relatively large impact on the global economy is hardly priced at all. If the virus translates into a strong slowdown in the Chinese economy (the latest reports by Bloomberg say that demand for oil fell by about 20%), i.e. also global, a strong change of sentiment can be observed.

This would result in increased risk aversion and supply pressure on emerging countries' currencies. However, positive sentiment in the market is currently improving their condition. The zloty profits from the current situation and pares some of the losses in relation to the main currencies around midday. The EUR/PLN exchange rate fell below 4.28, the lowest level since last Wednesday. Recently, the zloty has not been supported by data from the Polish economy (lower than expected GDP growth pace for 2019, industry's PMI), although the Polish currency is most strongly dependent on external factors and data from the domestic economy have a limited impact on it, especially as the MPC's interest rate changes over the coming year are not planned.

Pound under pressure, but today it catches its breath

Today, the pound, received support in the form of a higher-than-expected PMI index for the construction sector. Activity in this sector in January far exceeded expectations (48.4 pts against the consensus of 47.1 pts) and was the highest since May last year, although it still shows a slowdown (reading below 50 pts). However, this is another PMI reading that clearly exceeds market expectations, which may underline positive sentiment due to the elimination of election uncertainty and Brexit.

The British currency is still under pressure from the confrontational rhetoric of Boris Johnson on Monday. He reminded market participants how difficult a new trade agreement with the EU might be. The current agreement is valid until the end of the year. This may help maintain supply pressure on the pound later in the year, even though it is still the most overestimated G10 currency. The GBP/USD quotation after reaching its lowest level since the holiday season in December is around 1.30.

Although the GBP/PLN exchange rate also fell significantly from about 5.13 to 5.03 today, the relatively weaker condition of the zloty basket (due to greater uncertainty about the virus) continues to keep the quotations of this pair at a high level.

Later in the day, data on orders for machinery in the US in December, which may indicate the scale of industrial production, will be published. We can expect a slightly increased volatility in the afternoon. Basically, nothing should change. However, greater fluctuations of the dollar are possible if the data clearly deviate from the consensus.