Sentiment improves quickly (Afternoon analysis 27.06.2018)

27.06.2018 16:25|Bartosz Grejner

News from the US administration regarding no sanctions on Chinese investments improves market sentiment. The gradually strengthening dollar is expected to burden the zloty - the EUR/USD falls to approx. 1.16.

Will dollar win in both scenarios?

In the afternoon an improvement in market sentiment and a decrease in aversion to more risky assets can be observed. It is mainly due to information from the White House that President Donald Trump has decided not to introduce the strictest investment restrictions against China. Although this is not the end of the trade wars, one factor that was a burden on the market has been eliminated.

One hour before the US session mixed data about the market was published. Although May's deficit in international trade in goods turned out to be lower than expected (64.85 billion against expected 68.9 billion USD) and the lowest since September last year, the data on orders for durable goods failed. Core index (excluding transport orders) fell by 0.3% on a monthly basis in May, although an increase of 0.8% was expected.

The revision of the growth for April from 0.9% to 1.9% was positive. As a result of today's information sentiment should improve, taking into account the recent concerns about restrictions on international trade. This is good news for emerging currencies, including the zloty, which may be under pressure of outflowing capital in case of increased risk aversion.

The currency market copes with trade clashes between the powers better than the stock or bond market. Even before the aforementioned information from the White House, the dollar appreciated - the EUR/USD fell even slightly below 1.16 today, which was the lowest level since last Thursday. For the US currency, any scenario seems to be positive in the long run. The absence of trade wars favoured it due to its very good economic situation and faster than expected growth path of interest rates. If all the duties announced were actually introduced, the dollar would be able to appreciate, as the US could lose the least in these terms (to other countries) in such a situation.

The zloty's rate did not change significantly today and the sentiment improvement should protect the Polish currency against further depreciation. However, it remains under pressure from the dollar - its increase in value will have a negative impact on the zloty's basket, taking into account the dovish' attitude of the Monetary Policy Council towards raising interest rates (in opposition to the Federal Reserve). The euro quoted in the range of 4.33 - 4.34 PLN and the dollar in 3.73 - 3.74 PLN. If significant fluctuations of the dollar or a worsening of the market sentiment are not observed, the zloty's basket will stabilise around the current levels.

Tomorrow's preview

At 8.00 a.m., GfK will publish the German consumer confidence index. The median of expectations indicates a slight deterioration in it from 10.7 to 10.6. Taking into account potential customs wars and strong stock market declines, consumer sentiment in Europe's largest economy may weaken more than is evident from the market consensus.

At the same time, the Federal Statistics Office (Destatis) will publish May's data on retail sales - the market consensus forecasts a growth by 0.7% a month and by 1.3% a year (vs. 2.3% and 1.2% a month earlier, respectively). The sentiment on the market is currently weak - today, the main German market index (Dax) fell to its lowest level since April 5th this year. Weaker trade data could also reinforce the argument that economic growth is slowing down. It would not be a good scenario for the zloty and could lead to greater pressure on the zloty.

At 2.30 p.m., Destatis will publish preliminary consumer inflation data (CPI) in June. The median of expectations suggests a reading of 2.1% year-on-year (2.2% in May). This may be an important reading for the euro - a fall in inflation below expectations may slightly reduce the probability of a monetary tightening in the eurozone next year (it is certain that this will not happen before the end of the summer holidays). Lower rates in the eurozone in long-term also mean low rates in Poland, where the MPC is waiting for the ECB to raise interest rates. As a result, if the data is unfavourable tomorrow, the zloty may weaken in relation to the basic currencies.

 


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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 the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

See also:

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End of price cuts? (Afternoon analysis 26.06.2018)

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Dollar and zloty below in red (Afternoon analysis 25.06.2018)

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