Stronger dollar, weaker zloty (Daily analysis 23.04.2018)

PMI reading from the eurozone in line with expectations. Significant increases in the yields of US Treasury bonds - 10-year instruments close to 3% boundary. The zloty depreciated which was caused by a stronger dollar. The EUR/PLN pair close to the 4.20 boundary.

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.

PMI with negative surprise

Published in the morning April's PMI index in the eurozone did not surprise positively. Although the readings from Germany and France were slightly above economists' expectations, the overall publication from the single currency area was close to market consensus and the same as in March.

It is worth noting that the industrial production index dropped to 17-month lows. In turn, new orders were the lowest in the 15-month period for the eurozone. However, the employment component has increased, but it seems that the overall condition of both services and industry is unlikely to return to long-term highs observed at the beginning of the year.

The current readings should not be perceived as strongly pessimistic. Values around 55 points level are still relatively high. In addition, according to estimates, the Markit indicates approx. 0.6% GDP growth QOQ. The economic situation is therefore still positive, but the but the optimism seen at the beginning of the year is far from being present.

Dollar's going up

Last week, we stressed that the dollar may remain weak as long as yields of 10-year US bonds remain below 3.0%. Since then, however, there have been increases on these instruments in the range of 20 basis points and today the level of 3.0% was practically reached (2.9950). This is the main argument that led to the strong dollar appreciation in the last two days.

In addition, the difference between the yields of 10-year US and German Treasury bonds is the highest in almost 30 years. The market also estimates that the rates will increase by 56 basis points from their current level by the end of the year. This means two full increases of 25 basis points and a chance of a third increase in December.

Therefore, the market's key information will be the behaviour of US Treasury bonds in the coming days. The fact that many investors exceeded the level of 3.0% on the yields of 10-year instruments is perceived by many as the bond bear market (price decrease; yield increase). The panic in this market may signal a steeper path of interest rates in the coming quarters. This should be a positive signal for the dollar if the increase in profitability continues to be caused by higher inflation expectations and growing divergences between the future interest rates of the US and other developed countries.

Zloty under pressure

The last hours were characterised by a clear weakening of the zloty. Traditionally, the Polish currency is slightly more sensitive to external factors than e.g. forint, which means that the zloty lost not only to the euro, the dollar or the franc, but also to HUF. However, this movement does not differ from the standard behaviour of the Polish currency in the case of rising future interest rates in the USA and the strengthening of the dollar.

Competition caused by higher interest rates in the US may be an attractive bait for some of the portfolio capital involved in some emerging markets. In addition, in Poland or the eurozone, a monetary tightening is not expected. The extension of the current trend on the U.S. bond market and the yield of 10-year treasury bonds exceeding 3.0% (details in the previous paragraphs) may further increase the pressure on the emerging countries' currencies, including the zloty. In such a scenario, the EUR/PLN pair would quickly exceed 4.20 and USD would be higher than at present.