Stronger dollar, weaker orders in Germany (Daily analysis 8.01.2020)

The US currency appreciates. The EUR/USD exchange rate approaches 1.11. Geopolitical tensions increase demand for so-called safe havens. Gold is valued the highest since 2013, and the franc is the most expensive in relation to the euro since 2017. The zloty records only minor changes.

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

• 2:15 p.m.: Change in employment in the non-farm sector according to ADP (estimates: increase by 160k).

Market does not believe in the worst scenario

Sentiment in the broader market deteriorated slightly when, as a retaliation, Iranian forces fired rockets at two US bases in Iraq. This was followed by information from both sides, indicating that both the US and Iran do not want an escalation of the conflict or the outbreak of war. This is consistent with the view that entering the out-of-control situation is against the interests of both sides, especially Iran. Therefore, the market reaction seems to be adequate to expectations. We are observing an increase in risk aversion, but there is neither sell-out nor panic.

Still, a reaction to the geopolitical situation can be seen in the market. The demand for so-called safe havens, i.e. assets gaining in value in the period of increased uncertainty, for example, gold, the yen or the franc, has clearly increased. Today, the gold price exceeded 1,600 USD per ounce, which happened for the first time since April 2013, while today, the EUR/CHF quotations fell during the session in Asia below 1.08, i.e. to the lowest level since April 2017. The dollar is also appreciating, although its increase is limited and not solely due to the development of geopolitical tension.

The data from the US economy published yesterday were better than expected (higher than ISM's expectations in the services sector, the lowest trade deficit since 2016), so the dollar has some arguments to strengthen. However, it remains relatively weak in the context of recent weeks. Although the EUR/USD fell to around 1.1120, it still remains closed in the range of 1.11-1.12. Today, data from the German economy on factory orders have not helped either. Although they are subject to relatively large fluctuations from month to month, they may indicate what industrial production will look like in the coming months. The drop in orders by 1.3% month-on-month in November (vs expectations of 0.2% growth), which was the biggest since July, may somewhat suppress hopes for a rapid return of German industry to the growth path.

Zloty insensitive to geopolitical tension?

Given the increase in geopolitical tensions, the zloty remains stable. Similar sentiments prevail in the broader market. The main market indexes in Europe have reversed practically all losses, and the zloty remained close to yesterday's closing levels. The dollar, which is slightly stronger globally, caused the USD/PLN exchange rate to rise above 3.81, which is still low in the context of recent weeks. The EUR/PLN exchange rate still oscillates around 4.24, the CHF/PLN pair fluctuates at 3.92 and the GBP/PLN rate at 5.00. Therefore, there is little change in the PLN's value in relation to the main currencies, and the impact of geopolitics remains limited.

Later in the day, the ADP data on the change in employment in the non-farm sector in the USA will be released, which may introduce a little more volatility to the foreign exchange market (especially in the case of the dollar if the reading is significantly different from 160 thousand). In order to observe potentially greater changes in the valuation of major currencies, we will have to wait until Friday when the December report on the US labour market is published. However, ADP data may indicate what to expect from official data from the US Department of Labor.