Strong gold, strong zloty (Afternoon analysis 24.07.2020)

Dollar depreciates again. The data on activity in July in the US industrial and services sectors disappoint market expectations, strongly contrasting with better data from the eurozone. Gold is close to historical records, and the zloty is again among the strongest EM.

Data from the US disappoint

In the afternoon, the market received a "confirmation" of the disproportion between Europe and the US as regards dealing with the pandemic. While the data of PMI activity indexes of the industrial and services sectors surprised positively in July in the eurozone, analogous data from the USA disappointed market expectations.

For about a month now, it has been known that the recovery of the US economy from closure has not been as smooth as in Europe. Some states opened up too quickly and, after a sharp increase in coronavirus cases, had to close down again and/or halt the subsequent phases of the recovery.

Today it was reflected in the data. IHS Markit's industrial sector PMI index rose from 49.8 pts in June to 51.3 pts, but this was below the expected 52 pts. The stronger disappointment was observed in services, with PMI at 49.6 pts meaning that the sector is still in recession (expected to rise to 51 pts).

Another record of dollar weakness

These are obviously not disastrous data - the upward trend continues, but highlight the differences between the US and the Old Continent, in favour of the latter. This has visible consequences in the euro/dollar valuation. After the publication of the US data, on Friday afternoon, the EUR/USD quotations increased to about 1.1638, the highest level since September 2018.

The current strong condition of the euro is responsible for a significant part of the growth here, but the dollar was noticeably weaker than other currencies today. Although the USD/CHF exchange rate has been declining at a rapid pace for a week now, today it dropped around the 0.92 boundary, moving towards the lower volatility limit from July 2015 (approx. 0.9175). Today, the yen's quotations clearly awakened from the lethargy: the USD/JPY fell to around 105.75, the lowest level since mid-March, the period of the greatest financial market turbulence in connection with the pandemic.

The zloty gets strong as gold

The dollar's weakness is also shown in its relation to the zloty, which remains today one of the strongest (alongside the Czech koruna) currencies of emerging countries. The USD/PLN quotations remain below 3.80 boundary. Another limit to be exceeded is approx. 3.756 and a drop below it will mean the lowest level since July 2019. It is not ruled out, given that the zloty receives only positive impulses from both the country and the region, and the dollar mostly the opposite.

There is a certain uncertainty, as well as a potential stimulus to increase demand for the dollar, namely the strong escalation of geopolitical tension between the US and China on all fronts. For the time being, however, market participants are opting for gold, which is supported by a very low interest rate environment, which is unlikely to change in a year and a half perspective. The price per ounce of gold exceeded 1900 USD today, for the first time in 9 years and is approaching the historical records of September 2011 (about 1921 USD per ounce).