Inflation up, dollar down (Daily analysis 15.02.2018)

Sharp fluctuations in the market, but eventually they favour the zloty. The dollar is once again the weakest in three years, however, afternoon data on industrial production can appreciate it somewhat.

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

• 2:30 p.m.: Weekly data on initial jobless claims (estimates: 230k; previously: 221k),
• 3:15 p.m.: January's industrial production in the USA (estimates: 0.2% MOM; previously 0.9% MOM).

Dollar once again close to 3 year lows

Yesterday the long-awaited January data on consumer inflation (CPI) in the USA was published, the inflation amounted to 2.1% annually (0.2% percentage points above the market estimations). Its core index (excluded energy and food prices) rose to 1.8% per year and 0.3% per month - in both cases 0.1 percentage points above expectations. Moreover, it is also important that very little was missing for the annual price to increase to 1.9%, which would be its highest growth pace since April 2017.

The growth of the inflationary pressures caused changes in the bond market. The yields on the US Treasury bond maturing in 10 years increased to the highest level in 4 years (approx. 2.94%), while those maturing in 2 years reached more than 9-year highs (above 2.2%). In the first phase, the dollar's reaction was in line with debt instruments as it started to appreciate: EUR/USD quotations fell below 1.23 for a moment. However, later on, the dollar started to return profits, even incurring surplus.

This morning, one euro cost 1.25 USD (close to the highest level in three years). After yesterday's initial depreciation, a rapid change in market sentiment was observed (the main indexes in Europe and the USA started to appreciate). A continuation of this trend is observed today as almost 1% increases dominated the European market in the morning.

These two factors are very positive for the zloty, which appreciated the most among positive sentiment on the market and the weak dollar. The dollar's price expressed in zloty fell below 3.32 PLN in the morning, i.e. only 0.01 PLN more than the three year lows at the end of January. The positive sentiment also affected the whole zloty basket. EUR/PLN quotations moved down by 0.02 PLN to the range of 4.15-4.16.

Maintaining the current broad market's conditions will most likely support the high zloty valuation in relation to the main currencies. However, it is important to remember about the high volatility observed in the market and that the dollar should increase in value over time. If we observe the recovery of the dollar, the zloty may start to give up a part of the generated profits.

In the afternoon, data from the USA (especially data on January's industrial production) can help the dollar to implement this scenario. If it grows significantly above 0.2% per month (a market consensus is reached) and approaches December's growth of 0.9%, the dollar can be supported. Taking into account the dollar's valuation and market fluctuations, there are probably more threats to the zloty rate than growth potential.