Panic (Daily analysis 29.05.2018)

Movements on some instruments in the eurozone are beginning to resemble the events of 2011-2012, with large changes on the euro and the franc, but for the time being much smaller than it could be due to changes in government bonds. The zloty has been depreciating. The EUR/PLN is in the range of 4.31-4.32.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

Real panic

Yesterday, we pointed out that Italy's yields on two-year government bonds had risen from 0.3% to 1% in just two hours. However, this Monday the move looks relatively small, taking what has happened today into account. Such levels were seen in September 2012, during the eurozone debt crisis.

Huge changes are also visible on bonds with longer maturities. It is not, therefore, a matter of liquidity. The market is beginning to be dominated by fears that Italy may indeed leave the eurozone. This is also confirmed by the flow of capital to Germany's treasury bonds, whose yields decreased today and prices increased.

The currency market is less nervous than government bonds. Although we had the EUR/CHF drop below the 1.15 limit, but part of the losses on this pair were reduced. The EUR/USD also approached around 1.15, but returned to around 1.1530 in the early afternoon.

The situation on currencies in the coming days will largely depend on the populist parties' behaviour. Will some of their representatives continue to suggest leaving the Union or the eurozone, if Brussels does not meet their demands? If so, it seems that it will be difficult to improve the mood. It is also worth noting that even if the Movement or the League rhetoric is relaxed, the eurosceptic groups’ withdrawal from their views is, however, unrealistic, as it would contradict their identity.

As a result, the risks to the euro are likely to continue to apply at all times. The campaign in Italy is likely to be based on the confrontational position of populist parties towards Brussels, even if the very statement of 'leaving the euro area' is not on banners.

The zloty is relatively calm

The zloty's reaction to the events in Italy is quite limited. The fact that Italy runs the risk of leaving the eurozone will worsen its investment sentiment throughout the Union. Recently, it seemed that the eurosceptic mood had subsided (elections in France). The emergence of new risks on the horizon could also harm the economy of the EU as a whole if negative market sentiment persists.

Of course, this is also negative information for Poland and the zloty, which is dependent on the economic situation of the eurozone and changes on the EUR/USD. Therefore, the risks for the Polish zloty are still present, especially as external events (oil prices, expected interest rate rises in the USA) are not helping either.