Positive sentiment still present (Daily analysis 27.04.2020)

Plans for a gradual opening of economies and lower disease rates support positive sentiment in the broader market. A slightly weaker dollar strengthens the zloty, but the fluctuation range is limited. However, an important week for financial markets forecasts an increase in volatility.

Hope for recovery

The new week began with positive sentiment on the markets. Assets perceived as more risky were appreciating, which weakened the dollar slightly and improved sentiment towards emerging currencies, including the zloty. This was mainly due to an increase in market participants' hopes for a recovery in the economies after countries heavily affected by COVID-19 had seen smaller increases in the number of cases and/or deaths over the past days. The discussion about easing the restrictions that are holding back the return to growth in the economies is thus broadening.

Today's positive sentiment is not a clear signal that it will carry on in the weeks or even days to come. During the first day after his return to work, UK Prime Minister Boris Johnson announced that it was too early to lift restrictions within the "maximum risk" period, given the risk of a second wave of disease. Also, another important issue that may prevent the current prevailing positive sentiment from being maintained is the return of the global economy to its pre-pandemic condition. A year may not be long enough to achieve this level, and this may mean not as positive sentiment as we see today.

Although financial markets focus mainly on the months ahead and the easing of restrictions, the data published this week will, to some extent, provide an estimate regarding the scale of the devastation in major economies. On Wednesday, data on GDP growth pace in Q1 in the US will be published, where it is expected that the pace will drop by 3.9% q/q (annualised), and a day later, the data for the eurozone will be available, where economists are expecting a 3.5% drop. Deeper-than-consensus falls may worsen sentiment, potentially increasing pressure on assets with a higher risk profile.

In the next few days, there will be a real flood of quarterly reports on listed companies, mainly in the USA. In addition to macroeconomic data, they may suggest how strongly the virus has affected business operations and what can be expected in the coming months (although the data for Q2 will be more important in these respects).

Awaiting moves of central banks

The actions of central banks may be more important (and will probably provide greater fluctuations) than GDP data and reports on companies. Tonight, the announcement of the Bank of Japan (BoJ) will be released - in this case, even before the weekend, there were media reports that the bank will announce an unlimited bond purchase program. However, the BoJ statement is not the one most anticipated by market participants this week. On Wednesday evening, the Federal Reserve (Fed) will publish the statement after the Monetary Committee meeting and on Thursday the European Central Bank (ECB). The activities of these banks support the current positive sentiment in the markets to the greatest extent; therefore we can expect increased volatility around these publications. Especially in the context of the ECB, as European leaders have not developed clear, joint help actions, it has become a reference point for the financial market in the context of the pandemic. The media have already been speculating for over a week about the possible purchase of "junk" bonds by the ECB.

Given the variety of significant events this week, the short-term impact on the market, including foreign exchange, may be unclear. However, significant fluctuations are expected from Wednesday onwards. In the end, it seems that the current positive sentiment will be extremely difficult to maintain, given the disastrous macroeconomic data published so far.

Zloty gained

While waiting for these important events, Monday was marked by the dollar's depreciation. It's hard to talk about its weakness because the valuation against most currencies is still high. Quotations of EUR/USD increased to about 1.0860 in the morning, which is close to the upper limit since last Wednesday.

A reduction in demand pressure on the US currency is usually positive for the zloty and was no different until midday today. The USD/PLN exchange rate fell to about 4.16 (the lowest level since Tuesday), the CHF/PLN to 4.28 (the lowest since 12 days and around the lower boundary of quotations for a month), and the EUR/PLN to a weekly low of about 4.5140 PLN. The GBP/PLN exchange rate was slightly above the Friday closing (around 5.1850 around midday), which was due to the slightly stronger pound due to the weaker dollar and Johnson's return to work. Apart from the Bank of Japan's announcement at night, the calendar of macroeconomic events is practically empty, so the zloty's volatility range should remain limited and will only increase significantly from Wednesday.