The sentiment is getting better, and the zloty is getting stronger (Afternoon analysis 1.06.2020)

The Polish currency appreciates due to the positive sentiment that prevailed on Monday afternoon. The EUR/PLN exchange rate is aiming at breaking 4.40 boundary, coming closer and closer to the pre-pandemic rate, even though interest rates in Poland have been cut.

What does the PMI index show about the US market?

On Monday afternoon, the positive sentiment improved further. Such good sentiment is also supported by the weaker condition of the dollar. The main currency pair, i.e. EUR/USD, remains above 1.11, underlining an increased risk appetite in the broader market.

Half an hour after trading began on the New York Stock Exchange, ISM published PMI data measuring activity in the industrial sector. It reached 43.1 points in May, slightly more than in April: 41.5 points, but marginally below expectations - 43.8 points, as well as far from the line separating recession from expansion (50 points).

Even further away from this border is the employment component. Although it rose from 27.5 to 32.1 points in a month, it is still much closer to the April low than the February pre-pandemic level (46.9 points). In addition, federal aid packages are still active. However, if they come to an end (in the following months) and low consumer demand forces companies to make redundancies, this could put new pressure on the sector and ultimately worsen the currently prevailing positive sentiment.

The zloty still appreciates

However, when looking at the market's behaviour, it seems to be a worry for a later time. The optimism about the opening of economies and the lifting of restrictions is obviously not unjustified. We are observing an increase in the activity of economies. However, it is still too early to assess how consumer demand will develop. Consumer demand is the most important factor determining the path of the economies' return to the starting point, and indirectly the fate of many companies and the entire labour market.

The combination of the globally weaker dollar and an increased appetite for risk had a positive impact on the Polish currency even today. The market took to a limited extent the unexpected cut in interest rates in Poland, something that could weaken the zloty if sentiment worsened.

However, as long as we observe optimism in the broader market, the zloty seems safe. The EUR/PLN exchange rate fell again in the afternoon to 4.40. The last time the rate was below this level was in mid-March. Also, the USD/PLN exchange rate has been at its lowest level since mid-March, which today moved even further away from the 4.00 limit, reaching about 3.95 in the afternoon.

The calendar of scheduled events is practically empty for the rest of the day, and the market does not care about the worsening relations between the US and China, so the zloty should move around current levels by the end of the day. A more significant increase in volatility can be expected in the second part of the week. The ECB's decision on Thursday (expected increase in the stimulus program) will be announced, and on Friday the report on the US labour market in May (expected unemployment of nearly 20%) will be published.