Market bleeds, but currencies remain calm (Daily analysis 6.12.2018)

Extremely weak session on equities, strong oil prices depreciation and serious movements in bonds have an unusually limited impact on currencies. The zloty, like most other currencies, remains stable.

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

• 2:15 p.m.: Change in employment in the private sector by ADP (estimates: 195,000).
• 4:00 p.m.: ISM from outside the US industry ( estimates: 59 points).

Pronounced movements on broader market

Around midday, falls in futures contracts on the US indexes exceed 2%. The German market also loses more than 2%. Decreases of 4-5% are observed on crude oil, which loses its value due to fears of a lower than expected cut in production by OPEC and Russia, but also due to the risk of a weaker economic situation in subsequent quarters. The latter is indicated by movements on the equity market.

The yields of Treasury bonds continue to fall. This time slightly less on the long end of the curve and more on the short. In general, the market is very pessimistic. After all, even the reason for this risk aversion is worrying. The arrest of one of the main Chinese telecommunication companies' vice-president in Canada, even if it increases the risk in future business relations between Washington and Beijing, should not be the reason for such a strong sale. Therefore, the market must really fear a strong slowdown (reversal of part of the bond yield curve) and perhaps too hawkish attitude towards the expected economic conditions of the Federal Reserve.

However, a strong aversion to risk practically does not translate into the currency market at all. The EUR/USD pair is approx. 0.1% below the opening levels. The frank or the yen are slightly appreciating, but the changes in the range of 0.1-0.3% are symbolic, taking into account the fear of equities or crude oil and the downward pressure on the yields of the US Treasury bonds. Why is there such a limited reaction?

We already pointed this out in previous analyses. The signals from individual markets are not fully clear for currencies. Will the slowdown in the US economy increase the spread between the future interest rates of the Fed and the ECB? It is difficult to say.

The US "flu" may stop the Fed from increases, but it may also put more pressure on the economies in the eurozone and result in a lack of monetary tightening in the eurozone. China's problems are likely to have a greater impact on Europe and Asia, but if the Middle East is severely hampered, the US may also be affected. Part of the capital may return to safe havens (yen, franc). Is it really worth withdrawing this capital from emerging markets, when the situation in the domestic market may also deteriorate relatively quickly? As a consequence of too many mutually-negative signals, there is a stabilisation of currencies.

Zloty depreciates but slightly

The external situation for emerging market currencies is not positive, but it is also not dramatic. The lack of a strong move towards safe havens and falling oil prices reduce the negative impact of equity changes. Also, lower yields of the US Treasury bonds reduce the disproportion of future interest rates between economies where monetary policy movements were not expected anyway. This means a slight weakening of the zloty and confirms signals from the global currency market.

After yesterday's meeting of the Monetary Policy Council, little additional information was received. The Council aims to leave interest rates unchanged, and recent reports tend to reinforce this position. An important moment for the zloty will be the beginning of the session in the USA. We will see what data will come from ISM and ADP, as well as whether the spot market will continue the discount observed on futures contracts. If the situation does not deteriorate dramatically, the moderate weakening of PLN is unlikely to deepen.