Roles have shifted: the eurozone disappoints, the United States impresses (Afternoon analysis 21.08.2020)

Friday was supposed to provide important data from the eurozone and the USA, but few could expect that the former would turn out to be worse than expected, and the latter would positively surprise. In addition, this had an impact on currency quotations. The dollar pares incurred losses, and the zloty is clearly depreciating, with the USD/PLN exchange rate close to 3.75 PLN.

The euro becomes less attractive

Friday surprised the market with the twist on the market. The PMI indexes from the eurozone published this morning turned out to be weak and depreciated the euro, strengthening the dollar. In turn, the US news published this afternoon could further strengthen demand for the US currency. Why? Unlike in the eurozone, PMI indexes for the industrial and services sectors in the US have exceeded market expectations.

The PMI services index rose in the US in August to 54.8 points, above 50 points seen in July, expected 51 points and to its highest level since March 2019. The industry index also exceeded expectations, rising to 53.6 points, bringing the aggregate activity index in both sectors to its highest levels in over two years.

Real estate market in the USA is recovering

However, this was not the end of positive data from the USA. After the publication of activity indexes in the industry and services sectors, data on sales of homes in July were also presented. The growth of 24.7% on a monthly basis not only exceeded expectations of 14.7% and June's growth of 20.7% but also turned out to be a record since the statistics were conducted in 1999.

One must be aware that the base from which the increases are made was quite low. Still, in April there were drops of 17.8%. However, the July increase of 24.7% caused that the total number of houses put up for sale increased to 5.86 million, exceeding the February peak before the pandemic of 5.76 million and consequently setting the highest level since December 2006.

The dollar still has space for increases and the zloty is among the weakest currencies

Positive impulse given by much better-than-expected readings from the US in relation to disappointing data from Europe may give the dollar some room for growth. A stronger appreciation of the dollar may be held back by the still uncertain situation in the US labour market and the lack of agreement on fiscal stimulation in Congress between Democrats and Republicans. Once the data from the US labour market start to show improvement and fiscal issues are resolved, the way for the dollar to appreciate in the following months may be opened, especially as there is still uncertainty related to the second wave of the pandemic in the autumn-winter period and the November US presidential elections.

The scenario is now quite clear for the zloty: unexpectedly weaker data from the eurozone, combined with stronger growth in the US resulting in increased dollar demand, weaken the Polish currency and those of the countries in the region. The forint, the Czech koruna and the zloty are among the weakest currencies in the group of emerging countries this afternoon, which is the opposite of what we saw in the previous days.

At around 5:00 p.m., the USD/PLN exchange rate reached nearly 3.75 PLN, while the EUR/PLN exchange rate increased over 4.41 PLN. The future fate of the zloty, despite a strong increase in retail sales in Poland in July, depends primarily on the valuation of the dollar. It seems, however, as of today, there may be a slow shift towards the strengthening of the US currency, especially if subsequent macroeconomic data from the US confirm the positive trend and Congress breaks the deadlock on fiscal issues.