Strong movement on Polish bonds (Daily analysis 25.02.2019)

The growing chance of a trade agreement between the USA and China and the relatively mild message from the Fed improve global sentiment. The Brexit will be postponed until 2021. The zloty is stable, but strong upcoming fiscal stimulation may significantly increase the zloty's fluctuation range.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Trade agreement

On Friday, there were several speeches by the Federal Reserve members. It seems that the most important one concerned the plans related to the Fed's balance sheet. The Federal Reserve still has in its portfolio most of the Treasury bonds, and mortgage-related instruments (MBS) purchased during the quantitative easing process.

In the last paragraph of Randal Quarles' speech, a member of the Fed's Board of Governors, we can read: "If there are ever signs that our balance sheet plans are moving against our dual aim (price stability, maximum employment), we will quickly reconsider our approach in the context of the balance sheet."

So Quarles clearly suggests that the reduction of the Fed's balance sheet can be halted relatively quickly if the economic situation so requires. In turn, the Financial Times pointed out that in a text of Jerome Powell's speech to the Congress that was already published on Friday (the speech itself will take place tomorrow and the day after tomorrow), the balance sheet of the Federal Reserve will be much higher than before the crisis. You can see that the Fed wants to calm the market and if necessary, simply stop the balance sheet reduction, which will not be a particular problem. This is in line with the negative signals to the dollar from the Federal Reserve.

The sentiment is also positively influenced by the significant better message concerning China. Customs duties on Chinese goods will not be increased from March, and in addition, a meeting between President Xi and Donald Trump is likely to take place. The Shanghai market increased by almost 6% today, and the yuan appreciated about 0.4% to the dollar.

The UK will stay in the EU for the next two years?

Bloomberg reported today that EU officials assume that the period of UK membership will be extended by almost two years, i.e. until 2021. Until now, there has been the talk of extending this period by only a few months, and only if the agreement is close.

What is interesting, the fact that the Union extends this period gives Prime Minister Theresa May a great room for manoeuvre. She can tell the Eurosceptic members of the Conservative party that if they do not adopt her version of the agreement, the United Kingdom will remain in the EU for another two years to avoid a chaotic exit from the community. This may force them to support May's plan and choose (in their opinion) the lesser evil, i.e. consent to May's version of the Brexit (and backstop). Of course, such "blackmail" towards members of her own party may not succeed, and the government will disintegrate, but even if such a threat appears, both sides (London and Brussels) will do a lot to avoid an unordered Brexit. This is a positive signal for the pound.

The strong reaction of Treasury bonds

The fiscal stimulation in the form of the extension of the Family 500+ child benefit program and the thirteenth pension announced at the weekend resulted in strong changes in the Polish treasury instruments market. The yields on 10-year Treasury bonds increased by 15 basis points today, clearly exceeding the 2.9% level. The market may, on the one hand, value the higher probability of rate hikes (inflationary pressure due to stimulation) and, on the other hand, the deterioration of Poland's creditworthiness (e.g. the negative outlook for the rating, if the 3% deficit limit of the public finance sector this year was exceeded).

In the economic sense, changes can be negatively assessed by the market. They do not solve any of Poland's structural problems but are only a simple means of supporting the economic situation, which should usually be used when growth is clearly below potential in order to generate a demand impulse. In the case of the zloty, this may mean greater volatility. The budget for this year will probably be amended soon, as a significant part of the ideas will be implemented in the coming months. This entails the need to issue more bonds, some of which will be acquired by foreign capital. If the global sentiment worsens, this capital will withdraw, which will increase the zloty's volatility. If the monetary policy is too mild, it may have a negative impact on the zloty. The zloty is therefore much more volatile, and perhaps also much weaker if the Monetary Policy Council ignores the expected increase in inflation.