Waiting for an impact (Daily analysis 5.11.2018)

Elections in the USA and their hypothetical impact on the dollar. Is the ECB considering new TLTRO? The zloty remains relatively stable. The euro quotations are around the 4.31-4.32 PLN level.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 4:00 p.m.: ISM index from the US service sector. Data for October (estimates: 59.1 pts).

Awaiting for election results

The main currency pair returned below 1.1400, but the overall sentiment to the dollar is not as good as it was in the middle of last week. The lower risk of trade war escalation and clear oil falls helped Asian currencies to maintain recent growths, and thus also prevented the dollar from strengthening more strongly. In addition, the US currency is subject to volatility due to the results of elections to Congress.

On Tuesday, the Americans will elect a new Senate and House of Representatives. Estimates (e.g. the FiveThirtyEight platform) indicate that the lower chamber of the Congress will be taken over by the Democrats, while the higher one will remain in the hands of the Republicans. In this scenario, the dollar may be under little pressure, but its value should not decrease significantly. In addition, the risk of a collapse of the upward trend in the dollar is limited.

Greater volatility in currencies could be triggered by the victory of the Democrats throughout the Congress. A hypothetical conflict between the legislature and the executive (the White House) could have a negative impact on the US sentiment. In addition, the US approach to China could be less confrontational. This is good news for the economy, but from the perspective of a few months, it is bad for the dollar.

In the case of the Republicans holding power throughout the Congress, the dollar should be supported. First of all, there will probably be another fiscal stimulus (tax cuts for the middle class). This could prolong the upward trend in GDP growth above potential and at the same time give the Federal Reserve an argument for raising interest rates above the neutral border (about 3%).

It is also important how many votes the Democrats will have in the most likely scenario. An advantage of 20-30 seats would be considered neutral. However, if it was at the level of a few or a dozen or so seats, it would mean underestimating the results of the Republicans, which could, at least in the short term, allow the White House to build itself more space in policy-making. This could even lead to a situation where the US currency will not weaken.

Return to TLTRO?

When looking at the Old Continent, it is worth noting reports from Bloomberg (based on information from MNI) indicating that the ECB may consider a new round of TLTRO operations (low-cost loans to commercial banks to support credit action for the economy). On the one hand, this information may be positive for the banks, but it could mean that the ECB is more concerned about the economic situation of the single currency area.

As a result, this is rather negative information for the euro. If it is confirmed, it will prove that the ECB still wants to support the countries that clearly share the common currency. It may also mean a slower than expected increase in interest rates from the end of 2019.

Minor changes in zloty valuation

The zloty kept most of the increases from the second half of the week. EUR/PLN fluctuated around 4.31-4.32 in the morning. The zloty against the dollar was quoted slightly below the 3.80 PLN limit. In both cases, these seem to be core values for the following hours, even taking into account the hypothetical exchange rate disturbances associated with the ISM index publication from the US services sector.

On Wednesday, the Monetary Policy Council meeting is worth noticing. We will see whether the more dovish side of the MPC will draw attention to the need of keeping interest rates unchanged due to weak macroeconomic data from the country and the economic downturn in the eurozone. If so, the zloty may depreciate after Wednesday's Council meeting.