Yen sends some signals (Daily analysis 3.01.2019)

Rapid yen appreciation at the beginning of the Asian session. The dollar remains strong despite the market valuation of hike cuts. The zloty is depreciating due to a global increase in risk aversion and reports from Poland.

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

• 2:15: ADP data on changes in employment in the non-farm sector in the USA (estimates for December: 180,000).
• 4:00 p.m.: ISM data from the US industry sector (estimates for December: 57.5 pts).

What may bring uncertainty around the yen?

The past few hours were particularly dynamic and interesting in the currency market. First of all, yesterday's (until the end of the session in the USA) rebound on the US shares clearly favoured the dollar and pushed the EUR/USD pair to around 1.1350.

On the other hand, in the US real estate trade there was a sudden collapse of S&P 500 futures contracts after Apple reported lower sales of iPhone. This was probably a trigger for a sudden strengthening of the yen (at some point about 5% to the dollar in a few minutes). The low liquidity associated with the holiday session in Japan was also conducive to such a sudden movement. It is possible that - as Bloomberg reported - the behaviour of individual investors, whose stop-loss orders were activated by a surprisingly rapid movement, also played a significant role.

Most of the changes were quickly eliminated, but around midday (CET time), the yen is still about 1.5% stronger than at the end of yesterday's session in the USA. The increase in risk aversion has also weakened the pound, which is weaker to the euro than yesterday evening.

The EUR/USD exchange rate was practically unresponsive to the Japanese flash crash. There is also no reaction that weakens the dollar due to the deepening valuation of hike cuts by the Fed by the market (at the turn of 2019 and 2020 they may be lower by 10 basis points than at present).

This may show that the market's attention is shifting from the impact of monetary policy on currencies towards assessing the historical dependence of risk aversion and the dollar's valuation. Fear in the markets, apart from the return of capital to the yen and the franc (strengthening of these currencies), usually also meant a stronger dollar.

It is possible that for some time the dollar may appreciate during the growth of the US shares, and with greater risk aversion the dollar may remain stable because apart from the yen or the franc there is no particularly good alternative to the dollar. The euro's structural problems or the pound's exposure to Brexit risks are unlikely to attract capital looking for a safe haven. As a result, the dollar may behave relatively well in almost any scenario.

Zloty somewhat weaker

The external situation does not support the Polish currency. An increase in risk aversion and globally strong dollar cause that the US currency costs approx. 3.80 PLN. Global reshuffling is also visible in the case of the franc. The CHF/PLN pair is currently lacking less than 1% to reach the highest levels for a year and a half, i.e. 3.87.

Also, the events in the country are not favourable to the zloty. Although the lowest PMI in over 4 years from Polish industry probably overestimates the scale of the economic slowdown in Poland, it is not a positive event. Additionally, in the afternoon PAP reported (referring to Radio ZET) that the President of the National Bank of Poland Adam Glapinski will be questioned in the Prosecutor's Office in Katowice on Thursday and will testify in the KNF case. This information was also quickly published in international media (e.g. on Bloomberg TV).

As a consequence, the chances of strengthening the zloty are rather limited, and there is a growing risk that the current tendency of a mild weakening of the zloty may be prolonged.