Zloty benefits from weaker dollar (Afternoon analysis 7.11.2018)

Good sentiment dominates in the market and weakens the dollar. The zloty benefited from the good sentiment, which cannot be deteriorated even by a relatively dovish MPC conference.

EUR/PLN again below 4.30

For the first time in just over two weeks, the main currency pair, i.e. euro/dollar (EUR/USD), exceeded 1.15. Many factors contributed to the dollar depreciation. The US election result, though the most probable, does not indicate such a stimulative fiscal policy as if it had been the case with the Republican party taking over the entire Congress (and not just retaining power in the Senate).

After a series of weak data, something positive has occurred in the eurozone: the last few days have been characterised with better than expected data from PMI, Germany's industrial sector or today's relatively good retail sales data for the eurozone. However, this does not mean the end of the zone's problems. Some issues remain like Italy's budget or a slower than expected GDP growth pace. However, combined with falling oil prices (negative for the dollar) and increases in the global equity market (lower risk aversion), the US currency is depreciating.

It should be remembered that the rebound of the euro against the dollar and the global weakening of the latter is not as pronounced in the perspective of 1 and a half months. At the end of September, the EUR/USD pair was above 1.18, and a week ago it tested the 1.13 boundary. Today's increase to 1.15 is not as significant. After all, there is a large difference between monetary policy in the USA and the eurozone. In the first case, there are even suggestions for higher interest rates (above the neutral rate), and in the second case, any increase may still be postponed. In a broader perspective, this will continue to support the dollar and weaken the euro.

The zloty is supported by the current improvement in sentiment and slight supply pressure on the dollar. Its valuation in relation to the main currencies has clearly improved. The EUR/PLN exchange rate fell to around 4.29, while six days ago it approached the 4.35 level, recording a drop by about 1.4%. At the same time, the USD/PLN exchange rate fell by 2.6% to 3.74.

At 4:00 p.m., the Monetary Policy Council (MPC) will publish a statement after the two-day meeting, and a press conference with the participation of its President, Andrzej Glapinski, will also start. Although the MPC's message may even be expected to be milder (which in theory may be negative for the zloty), maintaining a positive sentiment on the market and the EUR/USD quotations close to the 1.15 boundary should support the zloty.

Tomorrow's preview

At 8:00 a.m. the Federal Statistics Office (Destatis) will publish data on foreign trade for September. The market consensus indicates a trade surplus (seasonally adjusted) of 18 billion EUR. Data from the German industrial sector surprised positively both regarding orders and production, which was one of the factors that strengthened the euro. Another set of better than expected data from Europe's largest economy may slightly reduce concerns about the economic slowdown in the eurozone, strengthening the single currency.

In the evening, the Federal Reserve will announce its decision on monetary policy. Interest rates are unlikely to be changed at this meeting. There may be some changes in the statement which will be published at 8:00 p.m.. Recent data from the US economy indicates that it is developing even at a slightly higher pace than expected. The record of the last meeting also suggests that interest rates in the US may need to be higher than expected. The appearance of a more hawkish tone in the statement may strengthen the dollar, which depreciated slightly in recent days.