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Zloty remained strong (Afternoon analysis 05.02.2018)

5 Feb 2018 15:39|Bartosz Grejner

The dollar appreciated slightly, however, it remained relatively weak. The worse sentiment on the market did not depreciate the zloty - the Polish currency even increased in relation to the euro or franc.

Zloty in the green

In global share markets, a continuation of declines was observed, mainly due to the increased probability of tightening monetary policy. The improvement of the global market situation (including faster economic growth, signs of inflation growth) may suggest that market participants end the accommodative monetary policy, which in theory may have an impact on the companies' profits (higher costs of collecting money).

Taking into account, that in recent months almost only rises were observed, these "fears" may turn out to be a natural adjustment before further increases. The high pace of economic development and lower taxes in the US since this year should support the implementation of this scenario.

Normally, declines in global share markets were not a good sign for the zloty. Today, despite the deepening of the last revaluation on European markets (and declines in contracts for main US indexes), the zloty appreciated in relation to the levels observed at closing on Friday.

The price of one euro has fallen to around 4.14 PLN this afternoon, the lower price level of the last few days. A similar situation was observed in the franc, whose price fell to 3.57 PLN. The dollar (slightly below 3.34 PLN) was also close to 3-year lows by less than 0.03 PLN. The pound, on the other hand, was depreciating due to worse than expected data concerning the service sector (the lowest PMI index in over a year), therefore, its price fell to the lowest level in two weeks - about 4.68 PLN.

ISM, dollar, shares

Today, around 4.00 p.m., ISM will publish data from the US service sector PMI index. After two months of declines, the market consensus assumes a slight increase by 0.5 pps to 56.5pps. A slightly better result than this could support the dollar, which is already strengthening slightly today. Although the dollar remained relatively weak, its prices have appreciated today. The EUR/USD quotations fell from 1.247 to 1.241 at around 3.00 p.m., which connected with the announcement of the sworn-up of the new Federal Reserve President Jerome H. Powell. A better than expected publication of the PMI could slightly strengthen this trend.

Futures contracts for main stock indexes in the USA indicate that they open below Friday's level. Further, higher indexes' declines in the following hours, combined with the growing dollar and yields on the US Treasury bonds, could have a negative impact on the Polish zloty. On the other hand, the recovery of the recent sharp drops in the US market share could support the zloty in the afternoon, maintaining its value close to current levels, in relation to the main currencies.

Tomorrow's preview

At 8.00 a.m. Destatis will present December's data on orders in the industry sector. Although its correlation is not ideal, it may give some guidance on industrial production, which will be known on Wednesday. The median of market expectations assumes growth of 0.6% per month. Given the dollar's weakness, a reading that clearly exceeding the consensus (1.2% and above) could provide an additional argument for maintaining the high euro valuation and could even raise the main currency pair quotation (the EUR/USD pair).

Before the session opening at 2.30 p.m. on the New York Stock Exchange, the Bureau of Economic Analysis (BEA) will present December's balance sheet data on foreign trade in goods in the USA. In November, the deficit unexpectedly increased to 50.5 billion USD, reaching its highs for 2.5 years. The market consensus assumes a further increase of this deficit to 52.5 billion USD in December, the highest level for almost 6 years. An increase in the deficit above this level could already mean approaching 10-year highs. This could, in turn, weaken the dollar, which has been subject to considerable volatility, which could further strengthen the current behaviour of the stock and bond market.

5 Feb 2018 15:39|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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