The zloty supported externally and internally (Daily analysis 21.07.2020)

European leaders reach a compromise. Credit risk in the region is falling, equities are increasing, and the zloty is also appreciating. The Polish currency is also supported by further positive reports from the country. The EUR/PLN exchange rate is the lowest since March 23rd.

Compromise reinforces optimism

On Tuesday, investors in Europe were welcomed by information about the agreement reached on the programme to rebuild European economies at the Brussels summit. Of the 750 billion EUR programme, 390 billion are to be given to countries in the form of non-refundable grants and the rest in the form of low-interest loans.

These are the amounts we have been talking about since yesterday morning. In line with expectations, more frugal countries have also negotiated discounts on their contributions for the next seven years. The final agreement is an important step towards a uniform response to the pandemic crisis in the EU.

Although the final agreement between the countries was widely expected, today the sentiment on the market has improved. The difference between German and Italian 10-year Treasury bond yields, one of the key measures of credit risk in the region, fell to its lowest level since the end of February when the market started to experience the biggest fluctuations in response to the imposed restrictions.

Today, optimism was also supported by the growth of the main European market indexes, which have reached their highest levels since late February. These positive sentiments on the broader market and the still good condition of the euro created factors supporting the zloty. In addition, the Polish currency received positive stimuli from the internal market today.

Resilient Polish consumer

After much higher-than-expected readings of industrial production in June (up by 0.5% year-on-year), retail sales surprised positively today. According to the Polish Central Statistical Office (GUS), it increased by 9% in June compared to May, while the readings were expected to be 1.5% lower. The year-on-year surprise was not as big as in the industry, but the decline by 1.9% compared to June last year was much lower than expected - 4.1%. Excluding the impact of inflation, the decline was 1.3%.

It's generally a perfect scenario for the zloty. Both external and internal factors are positive for the growth of the zloty's value, which is now seen in its quotations in relation to the main currencies. The EUR/PLN exchange rate fell to approx. 4.43 today, i.e. to its lowest level since June 23rd and the USD/PLN to its lowest level since March 12th. There are no events in the coming days that could potentially worsen the condition of the zloty.

On Friday, the preliminary data of the eurozone PMI indexes for July will be available, although here too we expect them to improve due to the positive effects of coping with the pandemic in Europe. The likelihood of the zloty weakening, as a result, is therefore rather limited. It is more likely that the zloty may depreciate somewhat at the moments when we will observe the rebound of the last rally of optimism on the broader market.