Weak global sentiment (Afternoon analysis 02.03.2018)

The issue of imposing tariffs on steel and aluminium in the US is a burden to the market. The main market indexes in Europe and the USA were deteriorating sentiment. Worse sentiment has a negative impact on the zloty.

The EUR/PLN pair at 4.20

No significant publications of macroeconomic data were scheduled today that could have an impact on foreign exchange quotations. All market attention was still focused on the tariffs for steel (25%) and aluminium (10%) proposed by the US President. At the beginning of the US session, sentiment in Europe was negative as the main market's indexes fell by nearly 2%, while WIG20 dropped by slightly over 1%. The aversion to more risky asset classes reduced the demand for the zloty with the exception of the weakened dollar, which was depreciated due to the possible customs war.

The euro cost 4.20 PLN and the franc 3.65 PLN - both the highest levels since February 9th. The zloty was protected due to the weaker position of the dollar, which was caused by customs issues. Moreover, there is uncertainty around Brexit and Britain's relations with the EU after it had a negative impact on the pound. As a result, the pound and the dollar's exchange rate remained close to the levels observed yesterday evening.

The zloty's quotations in the following hours will mostly depend on this evening’s US session. A greater depreciation on the main indexes (at 3:45PM Dow Jones lost about 1.5%) which could increase the outflow of capital from emerging countries, thus weakening the zloty. On the other hand, strengthening assets perceived as "safe havens", such as the franc, yen and gold (which have already been clearly appreciating) will advance.

Next week's preview

After the two-day meeting, the decision of the Monetary Policy Council's opinion on monetary policy will be published on Wednesday. Interest rates are expected to remain unchanged (reference rate 1.5%). However, the message that will be included in the statement and a press conference on the future level of interest rates will be important. So far, the most members have had a relatively accommodative approach to rate hikes.

Moreover, the issue of tariffs announced during the meeting may be presented by the US President as well as any possible reactions from Europe or China. This may limit global economic growth, which would negatively affect the price growth pace. This may be an additional argument for some members to keep rates unchanged. Therefore, the potential strengthening of the zloty after the MPC press conference (Wednesday at 4:00PM) is limited. External factors will have a much greater impact on the zloty's quotations next week.

One external factor will be February's report on the US labour market, which will be published on Friday. Data on changes in employment in the non-farm sector will be important, although the growth around 150k - 250k should be neutral for the market. The market's attention will be mainly focused on data changes in average hourly wages.

Taking into account the current large market fluctuations as a response to potentially faster monetary tightening, some significant fluctuations in the currency, share and bond markets may be expected around publication time. In January, they increased by 2.9% per year which exceeds the current market consensus of 2.8%. This could strengthen the probability of four rate hikes this year in the US, therefore appreciating the dollar and (possibly) causing a negative pressure on the stock market. Deterioration of the market sentiment, combined with the appreciating dollar, would weaken the demand for more risky assets, including the zloty.