Not only election results matter (Daily analysis 7.11.2018)

The election result not only depreciates the dollar but also supports emerging market currencies. Moreover, better than expected data from the eurozone and significantly lower oil prices also weaken the US currency. The zloty strengthens noticeably. The euro falls below the 4.30 level, and the dollar is sliding to the level of 3.73 PLN. Such a strong movement reduces the significance of today's meeting of the Polish Monetary Policy Council.

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

• 4:00 p.m.: Beginning of the press conference after the MPC meeting and publication of November macroeconomic forecasts.

Changes in Congress

As expected, Democrats took control of the House of Representatives. In the Senate, the Republicans will still have the majority. Looking also at the number of seats obtained in both chambers of Congress, they are more or less in line with the estimates of election polls. So what caused such strong changes in the dollar and emerging countries' currencies valuation?

As usual, during such events, there is an element of market uncertainty. Considering the quotations during the flow of results, the uncertainty diminished quite slowly. The Democrats' win could have given about 20-30 pips of support to the EUR/USD pair. The dollar weakening and the growth of the main currency pair had to be a result of other elements.

One of them is the relatively low oil prices, especially compared to the beginning of October. This is a negative signal for the dollar and a positive signal for the currencies of countries importing this raw material. While the US still imports oil, higher oil prices are conducive to investment in the US mining sector and pose a relatively small threat to consumption. For emerging countries, low prices reduce the cost of the economy and lessen the risk of trade imbalances. Lower prices support EM currencies and harm the dollar.

The data from Germany and the eurozone is also slightly better than expected. September's industrial production in Germany increased by 0.8% y/y, with expectations of 0.5% y/y. Also, data for August was revised upward, which meant that due to the depreciation, there was not a decrease in production y/y, but a slight increase (by 0.2%).

In the eurozone, retail sales fell slightly in MoM terms (no change vs. expectations +0.1%), but the data from August was clearly revised upward (from 1.8% to 2.2% y/y). As a result, this data may also improve sentiment to the euro, although it must be clear that the data is far from satisfactory.

It is also worth noting that futures contracts for S&P 500 indicate a strong opening in the USA, and yields of Treasury bonds in the USA are falling. Investors may expect that the lack of additional fiscal stimulation (there will probably be no further tax cuts) means lower inflationary pressure and less hawkish Fed. As a result, the sum of incoming information pushed the EUR/USD to the 1.1500 level, but this is not only the result of the elections to Congress.

Stronger zloty

By 9:00 a.m. the reaction of the zloty was moderate, even though the results in the US elections were already known. The zloty clearly appreciated when it turned out that market sentiment was evidently improving and yields on Treasury bonds were falling, suggesting a lower risk of hawkish Fed decisions. The EUR/PLN pair fell to 4.29 in the morning, and the dollar is already 0.10 PLN below the levels observed in the middle of last week.

A strong, positive global impulse should maintain the zloty's growth for the following hours. Global events may also cause the NBP press conference and macroeconomic forecasts to be ignored by the market, even if they are negative for the zloty.