Lower appetite for risk, the dollar appreciates (Daily analysis 14.05.2020)

The sentiment on the market clearly deteriorated after warnings of further waves of disease and the grim message from the chair of the Federal Reserve. The zloty depreciated and the likelihood of further weakening in the coming weeks has increased.

Increasing uncertainty enters into the market

During today's morning trade, there was a continuation of slightly weaker sentiment. Although there was nothing entirely different, the warnings about the next wave of the disease clearly frightened the market participants. They may have hoped for a more optimistic future as most countries relaxed their restrictions.

During his speech to the US Congress held on Tuesday, Dr Anthony Fauci (Director of the National Institute of Allergy and Infectious Diseases) warned against the economy opening up too quickly, as it could lead to the second wave of disease. This could result in the return of restrictions, which would be considerable damage to the economies. Although due to the strength and speed of its fiscal and monetary aid, the US is likely to do better than most advanced countries (and not only).

Yesterday afternoon, in turn, the Chair of the Federal Reserve, Jerome Powell, warned of the enormous damage to the economy. In a video conference for the Peterson Institute, he also stressed the uncertainty about the recovery path and any economic projections, adding that even more stimulation may be needed.

After a gloomy tone of Powell's speech, risk appetite declined sharply, causing share sales and pressure on emerging countries' currencies. The White House administration was trying to quickly "manage" this negative reaction from the market. Steve Mnuchin, Secretary of the Treasury in Donald Trump's administration, explained on Fox television what "Powell really wanted to say", forecasting that the economy will return to its pre-pandemic level next year. Donald Trump himself said during a press conference that the head of the Fed is now his "MIP" (most improved player - the player who made the greatest progress) and that he disagrees with him only on one point - negative interest rates, which Powell consistently excludes.

Is the zloty depreciating just to appreciate soon?

Although the foreign exchange market (for the most part) moved within a relatively limited volatility range, falls in the equity market worsen global sentiment, reinforcing sales pressure on emerging countries' currencies and strengthening the dollar. The stock market is somewhat detached from current economic realities, with strong growth from the March lows driven mainly by technology, biotechnology, pharmaceuticals and technology companies. The potential for the deterioration of sentiment in this market is very high, and this may also negatively affect the currencies of emerging countries (EM), including the zloty.

The Polish currency, like most EM, is bending under supply pressure. Day-to-day changes are not large and we continue to move within the limited fluctuation range of recent weeks, but these are the limits of these ranges. The zloty or most of the other EM currencies will have great growth potential, due to the gradual opening of the economies and the transition to increased activity. However, in the short term, days and weeks to come, the worsening of market sentiment and the growth of the dollar may negatively affect the zloty, which is already weakening.

The EUR/PLN exchange rate rose again above 4.57 at midday, while the USD/PLN exchange rate, approaching 4.24, is at its highest level since the first week of April. The zloty is no exception and follows market sentiment as well as changes in the stock and bond markets, but recent days have increased its potential to weaken in the coming weeks.