Stable zloty (Afternoon analysis 26.03.2018)

The beginning of the week in the financial markets. A weaker dollar and better sentiment support the zloty. China and the USA are trying to avoid a customs war, which reduces the risk of worsening market sentiment and, therefore, supports the zloty.

Dollar weakens

Clear sentiment improvement is visible on the market today. This is caused by the reduction in the risk of customs war between the US and China and the desire on both sides to come to an agreement. According to the Financial Times, China is expected to reduce its restrictions on investment capital from the US (from 49% to 51%), buy more semiconductors and reduce its tariffs on cars.

Better sentiment on the market translated into growth on the European market and over 1% on futures contracts for the main US indexes. The more positive sentiment observed recently has been correlated quite well with the weaker dollar. Today, the US currency depreciated by about 0.5% in relation to the euro or the zloty. The dollar index (DXY), which measures its strength against major currencies, fell below 89 points to its lowest level since mid-February.

Taking into account the desire of both sides to avoid a direct trade war, it reduces the probability of the market sentiment worsening even more and the continuation of the share market depreciation towards the end of the week. Finally, Canada, Mexico and the European Union were also excluded from customs duties on steel and aluminium. Therefore, it can be stated that tariffs were most likely part of the negotiating game, which may also mean that the market will no longer be as nervous about plans to introduce customs, being more sceptical about the chance of actually implementing them.

Moreover, it may be a good signal for the zloty. The Polish currency is somewhat weakened due to a lower probability of monetary tightening, in opposition to more hawkish signals from monetary authorities from other regions. In such circumstances, further sentiment deterioration could significantly worsen zloty valuation. However, when risk is limited, with a relatively weak dollar, the Polish currency should stabilize around the current levels or even strengthen slightly.

Tomorrow's preview

Tuesday's calendar of scheduled macroeconomic publications is relatively limited. At 11.00 a.m., soft data from the European Commission on the consumers and entrepreneurs sentiment in the eurozone. The index of both groups (concluded on the basis of surveys) slightly decreased in the previous two months. However, these levels are still close to 17-year highs. In March, it may further deteriorate in connection to the worsening of market sentiment (falling stock markets, increased risk of customs wars) as the market consensus assumes a drop from 114.1 pts in February to 113.4 pts in March. This data is rather secondary for the currency market, but a significant decrease could have a slight impact on general market sentiment (which may deteriorate). This may also have a negative impact on the weakened zloty.

At 4.00 p.m., the Conference Board (CB) will publish consumer sentiment index in the US in March. According to CB's survey, consumer sentiment reached over 17 years highs in February, while the median of expectations indicates a further increase to 131.2 points. The impact of this data on the dollar should also be limited. However, if it deviates significantly from the consensus, the dollar could weaken slightly.