Negative sentiment (Afternoon analysis 04.08.2018)

The pressure on emerging countries' currencies and the threat of new customs duties on imports from China are worsening sentiment on the market. The EUR/USD falls below 1.16. The zloty, although it is resistant to a deeper depreciation, also loses its value.

Dollar can be stronger

The continued depreciation of emerging currencies (EM) and the stock market have pushed the dollar up. The EUR/USD fell to around 1.155 today, its lowest level since August 24th. Macro publications that could have had a significant impact on the euro or the dollar were not published today, and the market also reacted to the threat of additional tariffs, which, according to Bloomberg, President Trump may announce as early as Thursday.

The zloty was also affected by the weakening and lost in relation to the main currencies, although less than other emerging currencies. The range of Polish currency fluctuations was within the limits observed in the previous days, except for the USD/PLN pair, which tested the 3.73 level around midday.

The zloty's condition in the next part of the day will largely depend on what is going to happen on the US markets. Today, the main European stock indexes lost almost 1.5% at 3:00 p.m. and the futures contracts for their American counterparts also marked the beginning of the session below Friday's levels (on Monday the US celebrated Labour Day).

A further deepening of the fall in the US index and depreciation of the EM currencies may contribute to a greater strengthening of the US currency. At 4:00 p.m., the ISM will also present the PMI index of the US industrial sector. Given today's market events, its impact on the dollar may already be limited. However, if the consensus were exceeded significantly (57.6 pts.) and the price sub-index also showed increased inflationary pressures, the dollar's appreciation could accelerate. This would also negatively affect the zloty's basket, which could be subject to further weakening.

Tomorrow's preview

At 2:30 p.m., the Bureau of Economic Analysis (BEA) will publish the US foreign trade balance in July. A median of market expectations indicates an increase in the deficit by nearly 4 billion to 50.2 billion USD. The currency market, including the dollar, is currently most affected by the potential escalation of the trade war between the US and China (Bloomberg reported last week that President Trump is to announce 25% tariffs on 200 billion USD of Chinese imports this week). The BEA data is thus likely to be of a secondary nature, although a positive reading of the deficit around 46 billion USD or below could further strengthen the dollar.

After the two-day Monetary Policy Council meeting, a statement on monetary policy will be published tomorrow at 4:00 p.m. Interest rates will not change. There are no arguments to suggest that monetary policy should be tightened up. The Polish economy is still in good condition, which should not cause any pressure to relax its stance on interest rates. However, this may cause increased uncertainty in the region (Italy, Greece, Turkey) or fears of a global economic slowdown through a potential escalation of the trade war. However, the base scenario assumes that external factors will play a much greater role in the zloty's valuation, hence the publication of the MPC or a subsequent press conference attended by its President will have a rather limited impact on the Polish currency.