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Record-high dollar (Daily analysis 2.09.2019)

2 Sept 2019 12:52|Marcin Lipka

The eurozone problems, uncertainties concerning the further fate of the trade war and the crisis in Argentina have a negative impact on the emerging market currencies and are pushing the EUR/USD exchange rate to the new lows. The zloty also remains under pressure, but a slight improvement in PMI for the Polish industry prevents the zloty from further depreciation. The dollar remains just below the 4.00 PLN limit.

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.
  • Labor Day in the USA.

Bright forecasts for dollar

On Friday, the EUR/USD pair fell below 1.10, which indicates that the US currency was the strongest against the European currency since April 2017. Information coming to the market suggests that the dollar's strength should be maintained. Several factors should support this.

First, there is a tense situation on the US-China line. Since the beginning of September, the United States has imposed additional tariffs on goods imported from China (annual imports worth 110 billion USD, 15% rate). In total, about 70% of imports from China (400 out of 550 billion USD) are currently subject to additional customs duties between 10% and 25%. China also increases restrictions on foreign trade, but these are to be introduced in stages by the end of the year (mainly by increasing rates).

The growing trade conflict, however, has a diverse impact on currencies. It does not harm the dollar (sometimes it even helps through the inflow of capital to a safe haven like the United States), but it puts pressure on a majority of Asian currencies. Today, the Chinese yuan has deepened its 11-year-old lows against the dollar, and the USD/CNY pair was quoted at around 7.17.

Argentina on the verge of bankruptcy

An unstable situation also occurs on the other side of the Pacific. Argentina is facing immense problems. Due to the significant advantage of the populist opposition in the August primary elections and catastrophic economic and political failures of the current administration, Argentina has become practically insolvent.

In August, the peso lost 25% of its value in relation to the dollar. Last week, two major rating agencies assessed the country's credibility at a level close to bankruptcy (S&P - selective default; Fitch - restricted default) for extending unilaterally the maturity of bonds maturing on August 30th. At the weekend, the Buenos Aires authorities introduced capital flow controls due to the outflow of foreign investors and melting foreign exchange reserves. The crisis in Latin American third-largest economy also has a negative impact on the entire region, given that its largest country (Brazil) cannot recover from the political and economic crisis that has been going on for several years. Therefore, Latin America is also becoming a negative element for the whole global sentiment.

No improvement in the eurozone

No positive information is coming from the eurozone, where the industry is still shrinking significantly, according to the PMI indexes. Moreover, August's core inflation rate published on Friday was only 0.9% year-on-year, which means that the chances for the ECB's decision to a return to quantitative easing and possibly further interest rate cuts are gradually decreasing. There is no optimistic information in the context of the Brexit, which has a negative impact on both the euro and the pound.

As a result, there are still relatively many arguments to keep the dollar relatively strong. The upcoming Fed members' speeches in the next few days (which are likely to be mixed, given the FOMC's indecisiveness in the last few minutes) and macroeconomic data should not change this either. Their message, even if it is slightly more negative than forecast, is unlikely to cause an outflow of capital from the dollar given the structural problems of other regions of the world.

Zloty is weak but stable

The Polish zloty remains under pressure from global events and expectations of the CJEU decision on loans denominated in Swiss currency. However, the Polish currency does not deepen the losses, and today's slightly better-than-expected data from Polish industry (PMI was clearly above expectations) should prevent the EUR/PLN pair from approaching the 4.40 boundary and help with declines to around 4.35 if the sentiment abroad improves at least temporarily.

However, it will become much more difficult for the zloty to resist global trends observed on the franc or the dollar. The US currency will probably remain strong, which should result in maintaining the USD/PLN exchange rate at around 4.00 PLN, or perhaps even exceeding this level, if, for example, it turns out that the planned trade talks between China and the USA in September will not take place.

2 Sept 2019 12:52|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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Zloty appreciates (Afternoon analysis 17.04.2019)

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Hope to come from Ifo (Daily analysis 25.03.2019)

22 Mar 2019 12:45

Dreadful data from Germany and France (Daily analysis 22.03.2019)

21 Mar 2019 17:14

Zloty as a winner (Afternoon analysis 21.03.2019)

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