Strong volatility (Daily analysis 12.07.2018)

12.07.2018 13:37|Marcin Lipka

The risk of increased restrictions in foreign trade affected the prices of raw materials. It also translated into higher currency volatility. The movements on the zloty, although they coincided with yesterday's MPC meeting, had an external source.

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

  • 2:30 p.m: US inflation for June (estimates: 0.2% month-on-month and 2.9% year-on-year; excluding fuels and food: 0.2% month-on-month and 2.3% year-on-year).

Raw materials drive the market

Yesterday, a clear fall in the raw materials' valuation was observed. Decreases in oil prices attracted the most attention, but the deepened sale also concerned agricultural raw materials or industrial metals. Mainly it was caused by concerns regarding global trade relations.

Investors are concerned that higher tariffs will reduce the world' economic activity. Businesses will be afraid to invest because of uncertainties on market access or risks associated with customs and non-tariff restrictions. This may also affect consumption and then it will be close to bringing the pound's growth well below potential.

During an economic slowdown, demand for energy resources or industrial metals is likely to be lower than expected. Therefore, yesterday's price falls. Negative trends have also been worsened on agricultural raw materials (sugar, coffee) and the recently widely discussed soybean (high stocks of this oilseed plant in the US and the reduction of the Chinese market due to duties create clear pressure on prices).

Fear on the raw materials market also translated into shares and currencies. We have seen declines in EUR/USD or new historical records of weakness in the Turkish lira (President Erdogan's suggestions for lower interest rates have also contributed to this).

Fear on the raw materials market also translated into shares and currencies. There has been a fall in the EUR/USD rate or, among other things, new historical lows in the Turkish lira (President Erdogan's suggestions for lower interest rates have contributed to this).

Although today's situation is somewhat calmer, yesterday's reaction of most asset classes to the disturbances in the raw materials market shows high nervousness of investors. Therefore, uncertainty about the external trade situation may continue to have a negative impact on the currencies of emerging markets. On the other hand, the beneficiaries are likely to remain the dollar, franc or yen.

Zloty under pressure

Yesterday, during a press conference after the MPC meeting, the EUR/PLN exchange rate rose from 4.32 to 4.34. However, this was not a result of new macroeconomic forecasts of the NBP or comments regarding interest rates. Both were in line with expectations and similar movements were also visible in other EM currencies. The weakness of zloty resulted from external disturbances initiated by raw materials.

At the end of the US session, the EUR/PLN tested 4.35. Today, trade is at a lower level, but the rapid movements of the zloty and other currencies of emerging countries are the result of fears about the escalation of foreign trade disputes and, consequently, threats to the global economic situation. This afternoon, also in the context of the zloty, the readings on inflation from the USA will be important. This is particularly true for core inflation, where even a minimal overshot of the estimates (by 0.1 percentage point) would result in an increase to the highest levels in less than a decade (2.4% year-on-year). If this were to happen, the dollar would strengthen and the zloty would weaken.


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