Zloty depreciates (Daily analysis 4.06.2020)

The National Bank of Poland's decision to cut the rates starts to burden the zloty. Deterioration in market sentiment and a slightly stronger dollar make the zloty the weakest currency among the emerging countries' currencies.

Sentiment deteriorates

There were no major macroeconomic events until midday today, but the sentiment has deteriorated somewhat. It seems that the optimism, which dominated the broader market, was gone even before today's decision of the European Central Bank and tomorrow's report on the US labour market.

The appetite for risk also declined. The main market indexes in Europe were losing up to 1%. This was enough to increase demand for the dollar. The EUR/USD quotations dropped to about 1.12 at midday. This level is still far from what we observed last week - 1.09 and a bit below. This change in market sentiment, which has been small for the time being, has also reduced the demand for emerging currencies (EM).

The zloty in the limelight

The zloty stood out against this background. The Polish currency was the most losing EM currency today (out of 24 basic currencies), with about 1% decreases to the euro, the dollar or the Swiss franc in the midday. The EUR/PLN exchange rate rose to nearly 4.46, although only yesterday we observed levels of about 4.37. The USD/PLN exchange rate was still below 4.00, but the midday's highs of about 3.98 indicate that this level will be exceeded if the dollar continues to strengthen in the global market.

In the morning, we observed a sample of what could potentially happen to the zloty if both the sentiment in the broader market and the dollar start to turn away from the trend of the past days. The surprising decision of the National Bank of Poland to cut interest rates had a very limited impact on the zloty as long as the market was dominated by optimism and the related high demand for EM currencies, and the dollar was losing value.

However, even a purely cosmetic change of sentiment in the broader market was enough to illustrate that the NBP's decision may increase the scale of the zloty's depreciation as sentiment deteriorates. And it should be remembered that the potential for this is relatively high, given the current dollar quotations and the situation on markets.

Waiting for the ECB's decision and US data

In the afternoon, market fluctuations may increase slightly when we learn about the decision of the European Central Bank, as well as weekly data on jobless claims in the USA. Tomorrow's report in the US may be a test of market sentiment. If the weaker sentiment persists until then, and the report's overtone is negative, it may prove to be an incentive for the market to increase risk aversion, which may ultimately also hit the zloty.