The spread of coronavirus in Europe concerns the market. The markets record declines of 4-5 percent, but the so-called safe havens increase. The zloty is weakening along with other emerging countries' currencies, and the scale of the weakening may increase.
Capital flows to safe havens
The week began with negative sentiment. The market is now responding primarily to concerns about the spread of the virus outside China. Investors were particularly surprised by cases of coronavirus in Italy. The number of people infected on Monday morning rose to 150, with four casualties. As a result, before midday, the main market indexes were losing nearly 4% compared to Friday's closing. The scale of falls on the Italian market reached almost 5 percent.
A strong increase in risk aversion also triggered a strong increase in demand for so-called safe havens, including gold, the yen, the franc or the dollar. The price of gold increased to around 1,690 USD per ounce, reaching its highest level since February 2013. Although currencies reacted in line with what should be expected in days of strong growth of risk aversion, the scale of currency exchange market volatility remains limited compared to other assets. Nevertheless, the impact of the virus on the global economy is likely to be greater than the market expected, which may maintain increased demand pressure on so-called safe havens.
The dollar may be different in this context. The US economy is still in good condition, even slightly better than expected. As long as there are no signs of a strong slowdown, the US assets are doing relatively well in the current situation. This includes the dollar, which can appreciate more as the coronavirus spreads. The EUR/USD quotations today were slightly above the 1.08 limit, i.e. just at the lower limit of the exchange rate since April 2017. The dollar index prepared by Bloomberg (which also includes emerging currencies) increased slightly above 1219 points, i.e. again close to the upper limit of quotations since October 2017 (around 1222 points).
4 PLN for one dollar is possible?
Deterioration of sentiment in the market with the strengthening dollar is not a good combination for the zloty. The Polish currency has been under considerable pressure since the beginning of quotations in the early hours of the night. Still in the morning, the EUR/PLN exchange rate reached about 4.3060, the highest level since the beginning of February. It has also been around the upper range since early December (about 4.31). If the market situation persists, this level may be exceeded.
Strong increases are also recorded in the USD/PLN pair. Its exchange rate, exceeding 3.98 today, reached its highest level since October 3. The risk of the coronavirus is unlikely to turn around overnight, so in the coming days, the pressure on the zloty basket may increase, which may result in exceeding the level of 4.00 for the USD/PLN pair.
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 acknowledgement of the source is prohibited.
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21 Feb 2020 14:47
Positive PMI data from the eurozone (Daily analysis 21.02.2020)
The spread of coronavirus in Europe concerns the market. The markets record declines of 4-5 percent, but the so-called safe havens increase. The zloty is weakening along with other emerging countries' currencies, and the scale of the weakening may increase.
Capital flows to safe havens
The week began with negative sentiment. The market is now responding primarily to concerns about the spread of the virus outside China. Investors were particularly surprised by cases of coronavirus in Italy. The number of people infected on Monday morning rose to 150, with four casualties. As a result, before midday, the main market indexes were losing nearly 4% compared to Friday's closing. The scale of falls on the Italian market reached almost 5 percent.
A strong increase in risk aversion also triggered a strong increase in demand for so-called safe havens, including gold, the yen, the franc or the dollar. The price of gold increased to around 1,690 USD per ounce, reaching its highest level since February 2013. Although currencies reacted in line with what should be expected in days of strong growth of risk aversion, the scale of currency exchange market volatility remains limited compared to other assets. Nevertheless, the impact of the virus on the global economy is likely to be greater than the market expected, which may maintain increased demand pressure on so-called safe havens.
The dollar may be different in this context. The US economy is still in good condition, even slightly better than expected. As long as there are no signs of a strong slowdown, the US assets are doing relatively well in the current situation. This includes the dollar, which can appreciate more as the coronavirus spreads. The EUR/USD quotations today were slightly above the 1.08 limit, i.e. just at the lower limit of the exchange rate since April 2017. The dollar index prepared by Bloomberg (which also includes emerging currencies) increased slightly above 1219 points, i.e. again close to the upper limit of quotations since October 2017 (around 1222 points).
4 PLN for one dollar is possible?
Deterioration of sentiment in the market with the strengthening dollar is not a good combination for the zloty. The Polish currency has been under considerable pressure since the beginning of quotations in the early hours of the night. Still in the morning, the EUR/PLN exchange rate reached about 4.3060, the highest level since the beginning of February. It has also been around the upper range since early December (about 4.31). If the market situation persists, this level may be exceeded.
Strong increases are also recorded in the USD/PLN pair. Its exchange rate, exceeding 3.98 today, reached its highest level since October 3. The risk of the coronavirus is unlikely to turn around overnight, so in the coming days, the pressure on the zloty basket may increase, which may result in exceeding the level of 4.00 for the USD/PLN pair.
See also:
Positive PMI data from the eurozone (Daily analysis 21.02.2020)
Beginning of the year belongs to the dollar and US economy (Afternoon analysis 20.02.2020)
Zloty under pressure exerted by the dollar (Daily analysis 20.02.2020)
US economy still surprises (Afternoon analysis 19.02.2020)
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