Weaker zloty (Daily analysis 19.11.2018)

Comments made by Fed representatives weaken the dollar. The zloty is under pressure from national events, but panic about the national currency is not a basic scenario for the next few days.

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.

Dollar weakens globally

Friday afternoon was not favourable for the US currency. The market received a lot of comments from Richard Clarida, the recently appointed deputy head of the Federal Reserve. What occurred in Clarida's CNBC interview to increase the EUR/USD pair by about 80-100 pips?

Without quoting specific passages of the speech, it is worth noting that Clarida may doubt if interest rate increases above their neutral level are necessary. The neutral level itself is difficult to estimate, but FOMC members believe that it is in the range of 2.5-3.5%.

One or two increases by 0.25 percentage points are lacking for the lower limit of this level. As a result, in Q1 2019, an intensified discussion on the need for further tightening of monetary policy can be expected, especially when inflation will not accelerate.

For Clarida, the behaviour of the world economy seems to be relatively significant. He highlighted the slowdown outside the US and probably lower GDP growth in the US next year.

On the other hand, Clarida's statements were not strong enough to negate the general trend (at least visible in September) of tightening monetary policy. Perhaps he is in the group of those members who see the need for two rather than three increases next year.

What could surprise was the fact that there was a frequent emphasis on the dependence of future decisions on incoming data. The Fed's decisions are always a result of the economic situation, but emphasising the fact may suggest a relatively quick cutoff of the rate hikes if the economic readings were below expectations. Moreover, to some extent, support for the risks associated with worse readings was provided by lower than expected data on industrial production in the USA.

An interview with Patrick Harker for "The Wall Street Journal" may have a negative impact on the dollar. Although the President of the Philadelphia Fed has no voice on interest rates until 2020, his doubts about the need for an increase in December may mean that the discussion on rates and the range of views is beginning to be relatively broad. From September, the percentage of members who see a flatter structure of future interest rates could also increase.

As a result, the dollar may be under pressure, especially if the upcoming data is weak. In the case of solid macroeconomic readings, the dovish comments may vanish. However, Clarida's interview was important and can now become a strong argument against dollar appreciation in the coming days.

Zloty under pressure

There is no panic regarding the zloty's valuation, but looking at its behaviour against the Czech crown or the forint, domestic events have decreased the zloty by about 0.7-0.8%. If nothing dramatic happens, this discount should not deepen. In the next few days, the zloty's situation may be tense and probably the risk of further weakening is greater than the chance to pare the recent losses.

Apart from national issues, the weaker dollar helps the currencies of emerging countries. On the other hand, the unstructured Brexit is much more important for some currencies throughout Europe (pound, euro, zloty, Czech koruna or forint) than for Asian or Latin American currencies. This element, taking into account recent reports, may also burden the region to some extent. In general, the situation in the zloty is becoming more complicated, but not enough to cause spikes on the zloty.