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Unjustified optimism (Daily analysis 28.08.2018)

28 Aug 2018 13:04|Marcin Lipka

Reaching historic highs on the US indexes with relatively low yields of the US Treasury bonds. The emerging market currencies, supported by the US-Mexico agreement, but the customs issues may accumulate. The EUR/PLN close to the 4.27 boundary. The margin for further zloty's appreciation is limited.

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.

Market sees through rose-coloured spectacles

During Monday's American trading session, US indexes reached new historic highs. This was caused by several factors. After Jerome Powell's speech, investors considered that the pace of monetary tightening in 2019 might be slower than FOMC's expectations in June indicated.

On Monday, good readings were received from Germany and the trade agreement between the USA and Mexico was announced. As a result, investors were given an ideal combination for further optimism. Firstly, lower financing costs, secondly, the chance for economic recovery outside the US, and thirdly, lower trade risks. Unfortunately, all these elements will be extremely difficult to implement in the long term.

Investors try to ignore the fact that with such euphoria on the trading floor, the chances of further rate hikes will increase, and not decrease or remain at the current level. Optimism related to a trade agreement may be justified to some extent, but this issue has been present at the market for a long time. The Mexican peso also took it into account which is proved by the fact that after a short appreciation it returned to the levels from before the official announcement of the deal.

China was not the main problem in the broad market, not Mexico, but market participants have forgotten about it. No progress has been made and, in addition, the agreement with the US's southern neighbour, the truce with the EU and the expected closer ties with Canada increase the risk of a more confrontational approach by the White House to Beijing. This, in turn, increases the risk that the US-China dispute will continue and an additional round of tariffs on goods from the Middle Kingdom will be introduced (25% for annual imports worth 200 billion USD).

As a result, the optimism experienced yesterday is unlikely to be repeated frequently. It is rather worth preparing for the fact that the combination of so many positive signals is a one-off event and the following days or weeks will happen either with higher yields of Treasury bonds in the USA or with a worse global sentiment. In both cases, these are not particularly good conditions for the currencies of the emerging markets but should be supported by the dollar.

Support for zloty

A good global sentiment supported the zloty in the last few hours. This was visible not only in the EUR/PLN pair, but also in the USD/PLN pair, where the weakness of the US currency was additionally added. Before midday, the zloty gave back some of the yesterday's increases, but its situation is still very good in comparison with the market (especially in the case of the forint).

The zloty should also remain relatively resistant to a hypothetical deterioration of the global sentiment or the dollar strengthening if the scale of these changes is not large. As a result, the Polish currency should be stable in the coming hours. The chances for continued appreciation as well as a more rapid weakening at this point are rather limited.

28 Aug 2018 13:04|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

27 Aug 2018 15:16

Positive sentiment supports zloty (Afternoon analysis 27.08.2018)

27 Aug 2018 13:01

Data from Germany surprised (Daily analysis 27.08.2018)

24 Aug 2018 16:33

Dollar falls after Powell's speech (Afternoon analysis 24.08.2018)

24 Aug 2018 14:51

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