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Unstable dollar (Daily analysis 4.02.2019)

4 Feb 2019 13:22|Marcin Lipka

The US currency pared most of the losses, but its fate is still uncertain. The key representatives of the Federal Reserve have given significant speeches. The zloty's fluctuations increased and depend on external events. With dovish suggestions from the Fed, the Polish currency may become somewhat stronger.

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.

What does the market believe in?

Although the changes in the broader market are not huge, it is clear that the situation between those who expect to keep the dovish position in the Federal Reserve for the next quarters and those who expect that the current behaviour of the Fed is too nervous and will probably return to the path of tightening the monetary policy represents something resembling a tug-of-war.

On Friday, the latter clearly outnumbered the others. Maybe the data from the US labour market did not help them (a drop in the rate of wage increases to 0.1% m/m), but the publication of the ISM did.

The main index for the US industry according to January data increased to 56.6 points (estimates 54.9 points). In addition, the components of new orders and production (58.2 points and 60.5 points respectively) rebounded very strongly. Such values suggest a very good condition of the industry and confirm that the US economy has a chance to develop quite quickly in the coming months.

This was noticed by investors on the bond market. The yields on 5-year or 10-year Treasury bonds increased from 5 to 7 basis points and pared a significant part of the losses caused by the mild transfer from the Federal Reserve. Smaller increases occurred on 2-year instruments, but they returned to about 2.5%, suggesting that the next move may be an interest rate increase, and the stabilization will not last for the next two years.

Along with the movement on bonds, we also had a strengthening of the dollar. The main currency pair, which was not able to cross the 1.1500 boundary, is now approx. 1.1450. Some emerging market currencies have also lost value since the end of Thursday's session (about 1% Indian rupee, 0.7% Chinese yuan or 0.5% Polish zloty).

Possibly in the coming days, there will be a lot of important speeches by the Federal Reserve members (not only those officially planned but also interviews in the industry media). This is particularly true for the members of the Board of Governors and the head of the New York branch of the FOMC, John Williams, but not necessarily the chairman Jerome Powell. His message was so dovish that it is hard to expect a milder message. As a result, the market will wait for what Richard Clarida (deputy head of the Federal Reserve) and Lael Brainard will say. If these members are as dovish as Powell on Wednesday (which in our opinion seems to be the baseline scenario), the chances of weakening the dollar will increase, and as a result, the currencies of emerging markets (including the zloty) should also be the beneficiaries of these events.

Zloty is more volatile

On Friday, the Polish currency lost its value quite quickly. To a lesser extent this was the result of weak PMI readings from the domestic economy and to a greater extent the noticeable increase in US Treasury bond yields and the reversal of the dollar's weakening. All in all, the EUR/PLN exchange rate returned on Friday to the 4.29 level, and at that level, it has also opened today.

During the first part of Monday's session, the euro fell to 4.28, which seems to be the base level for the zloty, taking into account the fact that the yields of Treasury bonds in the USA have pared most of Wednesday's losses.

As in the case of the global market, the closest appearances of the members of the Federal Reserve will probably be the most important. It seems that they should coincide with the announcement after Wednesday's meeting and will contribute to a slight weakening of the dollar. This should help the zloty, although the chances of re-testing around 4.26 per EUR/PLN are rather limited.

4 Feb 2019 13:22|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:

1 Feb 2019 16:59

Good data from the USA (Afternoon analysis 1.02.2019)

1 Feb 2019 14:18

Market awaits data (Daily analysis 1.02.2019)

31 Jan 2019 15:53

Zloty is winning (Afternoon analysis 31.01.2019)

31 Jan 2019 13:49

Dovish Fed and Poland at the top of the class (Daily analysis 31.01.2019)

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