Zloty gives up profits (Daily analysis 20.02.2018)

The dollar is supported by a globally weaker sentiment and an increase of yields on the US Treasury bonds. The market awaits the second half of the week. The zloty gives up the majority of profits gained yesterday. The EUR/PLN pair returns close to 4.15. Favourable data form Polish economy is ignored by investors.

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.

Worse sentiment

Since February began, almost every analysis has focused on the general market sentiment. This is due to the fact that since sharp drops began on the US market three weeks ago, the sentiment has had a significant impact and stimulated quotations on currencies.

Today the situation will repeat. Apart from the ZEW index, which describes German economic sentiment towards the south, there was no important macro data. However, significant changes to the EUR/USD were observed. At the beginning of the European session, the quotations were still around 1.2400 and after a few hours, the pair returned below 1.2350.

The dollar's appreciation and the euro's weakening took place simultaneously with the cooling of sentiment in European markets and the declines in futures contracts for the US indexes. This has recently been a positive sign for the dollar, especially when downward trends in shares are connected with an increase in the US government bond yields. Today, the yield on Treasury bonds maturing in 5 years has risen to the highest levels in less than 8 years.

Despite these favourable conditions for the dollar, it is unlikely that a breakthrough in the US currency will take place. A stronger message is likely needed from the Fed on the monetary policy (four rate hikes this year). The lack of capital flows to emerging economies will also happen. As long as these two elements do not meet, it will be difficult to increase rates.

Zloty gives up profits

The zloty was much stronger yesterday. In the evening, the EUR/PLN pair tested the 4.13 boundary. The Polish currency was somewhat stimulated by a reopening of the discussion about hypothetical rate hikes in 2018.

For an interview with Bloomberg, Polish MPC member Eugeniusz Gatnar stated that inflation will be at or above 2.5% in the second half of the year. Gatnar also said that wages in Poland may grow at a rate of 10-12% near the end of the year. One member of the MPC is "deeply concerned" about negative real interest rates. Łukasz Hardt's comments (also a member of the Council) were less hawkish than Gatnar's, but in an interview with the Polish Press Agency (PAP) he did not rule out increases this year, although the chances were not lower than previously expected due to a slower increase in core inflation.

Comments by Teresa Czerwinska in Reuters could have also helped the zloty to some extent. The Minister of Finance said that due to strong economic foundations and a very good labour market, there is reason to strengthen the zloty, and the current exchange rate of the zloty should not evoke concerns. This could convince some investors that there is still some room for zloty appreciation before it will be inconvenient for national officials.

However, the worse global sentiment caused a situation where the zloty gave up a large part of yesterday's profits and the EUR/PLN pair returned to 4.15. The zloty was not supported by favourable data from the domestic economy (retail sales and industrial production grew significantly above the market consensus). In addition, construction production increased significantly and amounted to 34.7% year-on-year in January, which is the best result in 11 years. Even if the latter value was supported by the weather (a warm January), the data suggests a strong opening of the year in the Polish economy.

Although the zloty was under the general market trend and has weakened, good macroeconomic data, statements from MPC members and a fearlessness about the zloty's exchange rate should support the Polish currency. Therefore, if there is no strong outflow of capital from emerging markets and declines in the foreign market, the Polish currency should remain relatively strong.