Risk aversion (Daily analysis 25.04.2018)

Weak global sentiment and growing yields of the US Treasury bonds are a dangerous combination for the emerging market currencies. The zloty is clearly depreciating and the EUR/PLN pair is around 4.22. Should we be worried about a drop in Polish industry?

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.

Dangerous mix

The situation in a broad market became more complicated. The yields of the US Treasury bonds maturing in 10-year are at the 3.02% level, which means that 3.00% was exceeded. In addition, share prices are falling in developed markets. This is a dangerous mix for the currencies of emerging markets. Why?

For the past few weeks or months, the exchange rates are determined by the flow of portfolio capital. In good times and with low interest rates in developed economies, this capital is looking for a chance for high return rates in developing countries. That is why emerging market currencies often appreciate during a positive global situation.

When interest rates increase in developed countries (e.g. the US) and remain stable in emerging countries, the situation becomes more complicated. Funding costs, e.g. for US investors, are rising and foreign investments are becoming less lucrative. In addition, when there is the possibility of a weaker sentiment, which may affect the condition of emerging countries, then it is the stimulus to withdraw capital increases.

Several reasons can be identified to explain the growing government bonds in the US. Not all of them are negative for the global economy. Some investors may believe that future economic growth in the United States, and consequently inflation, may be higher than expected. Fears of too strong fiscal stimulation towards the US economy (lower taxes generate this year public finance sector deficit in the US at the level of about 1 trillion USD, i.e. 5% of GDP) can be perceived as another reason, which must be balanced with a more restrictive monetary policy (higher interest rates).

The high value of expected bond issues, needed to cover the huge budget gap in the USA, also increases the yield of Treasury instruments. In the long run, this is not a positive sign for the dollar, but in the next few months, it may help the dollar through higher interest rates or a return of capital to the USA.

Zloty is depreciating

In the morning the EUR/PLN pair tested the 4.22 level. About 0.03 PLN is lacking for the euro to reach the highest levels in six months. The zloty's weakness is primarily a result of the global situation. Higher yields of the US government bonds, combined with increased risk aversion, represent unfavourable conditions for emerging countries (see previous paragraphs).

At a glance, March industrial orders published in the last GUS Statistical Bulletin may be worrying. The orders fell by 16.2% YOY, which was the weakest result since February 2013. On the other hand, the new non-domestic orders dropped by 24.3% year-on-year, i.e. the most since 2006. The consolation may be that this data is quite variable and in March a year before it was very strong (an increase of 33% and 43.9%, respectively). Therefore, for the time being, this issue should not be perceived as a huge problem. However, the zloty may be under pressure due to global factors, as it has been the case in recent days, and the 4.25 EUR/PLN test is not excluded as foreign trends deepen.