More notable fluctuations on the dollar (Afternoon analysis 28.02.2020)

Data indicate that the coronavirus has not had a significant impact on the US economy so far. Fear observed on the market, however, causes the outflow into bonds which deepens the decline of the main market indexes. Stronger fluctuations of the dollar. The zloty basket remains weakened.

Mixed data from the US economy

Friday turned out to be an interesting day on the markets. In the afternoon, a series of data from the US economy for January was presented. The deficit in international trade in goods was lower than expected by 3 billion USD, falling to 65.5 billion USD. Americans' income increased by 0.6% on a monthly basis, i.e. by 0.2 percentage points above expectations. Slightly lower than expected - by 0.1 percentage point - were expenses that increased by 0.2% month-on-month. PCE core inflation was also below the market consensus - 1.7% year-on-year vs expectations of 1.8%.

Half an hour after the start of trading on the New York Stock Exchange, better information came in. The PMI index of business activity in the Chicago area rose to 49 points, 3 points above expectations, and the final US consumer sentiment index data (according to the University of Michigan) turned out to be higher than the preliminary reading by 0.3 points, rising to 101 points. These data are already for February, which may suggest that the coronavirus has not significantly affected the US economy.

Still, however, investors are escaping with capital to Treasury bonds. The yields of 2-year US bonds deepened the fall below 1% in the afternoon, falling to about 0.8953 (the lowest since 2016). Historical lows were deepened for another day in a row by the yields of 10- and 30-year bonds. The drastic increase in the cost of debt in the US has contributed to the Federal Reserve's (Fed) valuation of nearly four interest rate cuts by the end of the year.

These expectations could have been cooled down by James Bullard, a member of the Fed's monetary committee. In his speech in Arkansas, he stated that the Fed does not need to cut interest rates now, and that the US economy continues to feel the positive effects of the 2019 cuts, while the current decline in Treasury bond yields is beneficial. He pointed out that cuts are possible, but if the coronavirus turns into a pandemic. Bullard's words may be all the more important as he is one of the most "dovish" members of the monetary committee and the expected interest rate cuts may not happen, or it will not happen so quickly and not in the number expected today.

The dollar's fluctuations increased today. After reaching 1.1053, the EUR/USD exchange rate dropped quickly to around 1.0951. As a result, the USD/PLN exchange rate fluctuated between approx. 3.92 and 3.95. The zloty basket remained weaker, although the EUR/PLN exchange rate did not exceed its highs, remaining at the level of approx. 4.34. The pressure on the zloty may increase later in the day, as some investors may decide to start the weekend without open long positions, knowing about the virus spreading in Europe and the USA.

Next week's preview

Currency quotations in the next week will continue to be strongly influenced by coronavirus reports. Market focus has clearly shifted from what is happening in China to, among others, Europe and the USA, where new cases of the disease are now being reported and the spread of the virus in these regions can largely dictate market sentiment.

Just before the new week, the PMI data measuring activity in the industrial and services sectors in China in February will be published on Saturday. In both cases, strong declines are expected: in the industry from 50 to 45 points, and in services from 54.1 to 50.5 points. Deeper-than-expected declines could further worsen market sentiment at the start of Monday's quotations, increasing the already significant level of risk aversion.

IHS Markit's PMI indexes for the USA turned out to be surprisingly weak in February. For the dollar, it will be important next week whether the PMI indexes from ISM will confirm the surprisingly weak readings of IHS Markit. The readings for the industry will be announced on Monday (consensus 50.5 points), while for services on Wednesday (consensus 55.1 points).

A significant event will be Friday's report on the US labour market, including data on changes in employment in the non-farm sector (consensus 178k) and in average hourly wages (consensus 3.0% year-on-year). Slightly weaker-than-expected data could strengthen the argument for the Federal Reserve to cut rates if the situation with the coronavirus were to get worse.