The market is more and more uncertain about the impact of coronavirus on the global economy. The aversion to risk is growing, the dollar appreciates. The euro against the US currency falls to its lowest level in almost three years.
Coronavirus without an impact on the dollar
Tuesday was dominated by an increased level of risk aversion. The main market indexes declined due to concerns about the negative impact of coronavirus on the economy. This happened, among others, after a warning from Apple, which announced that it would not meet its Q1 sales target. The publication of the ZEW index of economists' sentiment towards the condition of the German economy also contributed to the deterioration of sentiment. The reading significantly disappointed the market expectations. As a result, apart from the weakening of the euro, the demand for the US currency increased strongly.
Since last Thursday, the EUR/USD quotations have remained close to 1.0800. Today, however, this boundary was crossed, and the value of the euro fell for the first time since April 2017 below 1.08 USD. The increased flow towards the dollar also exerts supply pressure on emerging country currencies (EM). The Bloomberg index of the dollar, which includes EM currencies, rose just above 1210 points today, to the upper limit since October.
Currently, there is no strong deterioration in sentiment on the market, given that still, despite slight declines on the markets, the main indexes are close to historical records. However, today's strengthening of the dollar may indicate that the upward trend may still gain pace if macroeconomic data in the following days and weeks suggest a strong negative impact of the coronavirus on the global economy.
Negative scenarios for the zloty
The dollar appreciation resulted in an increase in the USD/PLN exchange rate above 3.96 for the first time since October 3 last year. However, the zloty depreciated not only in relation to the US currency. The entire zloty basket was clearly weaker, with the EUR/PLN exchange rate approaching 4.28, the CHF/PLN slightly above 4.02, and the GBP/PLN reaching 5.16, the highest level since the election to the British Parliament in mid-December. Further appreciation of the dollar may contribute to increased supply pressure on the zloty basket.
The US currency is appreciating strongly, among other things, due to the greater than expected disproportion between the condition of the US and eurozone economies, with the latter being at a disadvantage. On Friday, significant data on PMI activity indexes for the industrial and services sector will be published, which due to the coronavirus may clearly disappoint the market expectations (already predicting declines). This would be a negative scenario not only for the euro, but it could also weaken the zloty against the main currencies.
At 10:30 a.m., the Office of National Statistics (ONS) will publish consumer inflation data (CPI) in Great Britain in January. The median of market expectations indicates a core inflation reading (excluding energy and food prices) at 1.5% year-on-year, 0.1 percentage points above December's level. Whereas the reading of a month ago by 0.3 percentage points failed market expectations, increasing the probability of interest rate cuts. Their cut did not take place at the meeting at the end of January; however, it is not ruled out that it will take place later in the year. Lower-than-expected core inflation could strengthen this probability, slightly weakening the pound.
At 8:00 p.m, the Federal Reserve will publish a record of the discussions at the last meeting of the Monetary Committee (FOMC). The so-called "minutes", although they may increase the fluctuation range particularly in the dollar, are unlikely to have a fundamental impact on them. Currently, the most important factor seems to be the impact of coronavirus on the economy and how the Federal Reserve can respond to the slowdown. Potentially, it could do so by cutting interest rates, although this is not yet signalled.