Is it calm before the storm? (Afternoon analysis 30.03.2018)

Friday's trade with no significant movements. Next week may bring more volatility to the market and the zloty depreciation.

Pre-Holiday stabilization

Today, the lack of a large part of investors was visible on the currency market. Moreover, the main European and US market had a non-trading day. This resulted in low liquidity and volatility during the last session of this quarter. The absence of important publications and events scheduled for the rest of the day suggests that the situation in the afternoon will be similar.

The main currency pairs' quotations were relatively volatile - the EUR/USD exchange rate was just above 1.23. The zloty remained stable and its value in relation to the main currencies oscillated around yesterday's levels. The euro cost about 4.21 PLN, and the dollar about 3.41 PLN. Moreover, today no significant changes in their exchange rates are expected. Such a calm situation is not to be anticipated in the next 7 days.

If inflation in Poland (reading on Wednesday) fails expectations and the price pressure again turns out to be lower, given the more and more dovish attitude of the Monetary Policy Council towards the interest rates and lower probability to introduce rate hikes this year, the zloty may be under significant supply pressure. This may only mark the beginning of problems for the Polish currency as the potential strengthening of the dollar on Friday (more below) may theoretically be even greater.

Next week's preview

Next week may be characterised by significant volatility in the currency market. Apart from a reading on ISM indexes for the US and inflation data for Poland and the eurozone, on Friday, a monthly report on the labour market in the USA in March will be published. The most important data will include changes in employment and wages of Americans. The market should focus on the latter in particular as high wage growth pace may exert pressure on inflation, which, although it is expected to increase in the US, it is still subdued.

The market consensus assumes an increase in wages by 2.7% yearly and 0.3% monthly. It seems that exceeding this value even by 0.1 percentage points may cause strong dollar appreciation. A higher than expected increase in wages (especially around 3%) could increase the probability of four rate hikes. Such a scenario would be rather negative for the zloty, which could be under considerable pressure.