Weak data from Germany, the dollar appreciates strongly (Daily analysis 18.02.2020)

18 Feb 2020 13:37|Bartosz Grejner

Sentiment on the market changed following yesterday's Apple announcement and today's publication of the ZEW index for Germany. The published index turned out to be much weaker than expected. The EUR/USD exchange rate is at its lowest since April 2017 and is approaching 1.08. The zloty is depreciating: the EUR/PLN pair is close to 4.28.

Apple releases statement: Target will not be reached

The market's sentiment is deteriorating. Late last night, an increase in risk aversion was observed after the Apple announcement. As a result of the coronavirus and consequently lower demand (some stores in China are closed, or they operate to a limited extent), Apple admitted that it would not be able to meet its sales target for Q1 this year. Futures on the main market indexes were dropping sharply; the session in Asia also ended in declines, and a similar scenario was also observed in Europe already in the morning.

Apple's announcement may have reminded the market of the current risks of the decline in demand caused by a coronavirus. So far, the focus has been on strong rebounds later in the year. It was supported by the actions of the Chinese central bank (PBOC), that cared about liquidity in the market, which kept the general sentiment high, and market indexes on historical highs. However, this calm period may slowly come to an end. The situation will change when data on the effects of a sharp drop in demand in China will start to come in, not only for individual companies but also for entire economies that are to some extent dependent on China.

Economists' pessimism towards the largest economy in the eurozone

The first incoming signals are not optimistic. Published today ZEW institute's index measuring economists' sentiment towards the German economy clearly disappointed market expectations. The reading at 8.7 points was as much as 12.8 points below expectations, which already assumed a decrease compared to January. Another significant data that may confirm this negative trend will be the PMI indexes published on Friday.

Therefore, there are currently not many arguments for the increasing demand for assets perceived as riskier. The main market indexes in Europe were losing about 0.5-1 percent by midday, and the euro also remained under supply pressure. The scale of changes of the euro in relation to the dollar was not large and reached slightly above 0.1% around the midday, but the EUR/USD quotations set a new, lowest level since April 2017, falling to about 1.0820.

Drops in companies translate into drops in the zloty?

The inflow of negative information may cause a further decline in the EUR/USD pair below 1.08 towards 1.05 in the coming weeks. Increased demand pressure on the dollar is already putting more pressure on the currencies of emerging countries, including the zloty. The zloty basket is clearly weaker today. The EUR/PLN exchange rate rose to nearly 4.28, which is the upper limit of quotations since February 4, and the USD/PLN exchange rate reached 3.95 for the first time since the second week of October.

18 Feb 2020 13:37|Bartosz Grejner

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.

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