Zloty remains unchanged (Afternoon analysis 07.03.2018)

The US commodity trade deficit in January rose unexpectedly to its highest levels for over 9 years. Today, the dollar (in relation to the euro) was at its weakest since mid-February. Was zloty growth potential limited due to the upcoming statement and press conference from the MPC?

Dollar weakness

Apprehension was present in the market. Rapid swings in sentiment from positive to negative had a negative impact on the Polish currency, which lost slightly in relation to the majority of the main currencies. This was caused by the dollar's maintained weakness, which (in the past few months) has helped the zloty. Today, the quotations of the main currency pair (EUR/USD), rose to around 1.245, the highest level since mid-February.

Today's data did not support the dollar. Although ADP data on employment changes in the non-farm sector in the USA showed an increase by 235k, 40k above expectation, the positive correlation with the official data from the Department of Labor (on Friday) is not always favorable. For this reason, the market may be slightly sceptical about the ADP publication.

On the other hand, the commodity trade balance in the world's largest economy was much worse. The deficit amounted to 56.6 billion USD in January and was the largest in just over 9 years. This is negative information for the dollar. It may deteriorate the market's sentiment during the US session due to the recent events. It could also give the US President additional arguments towards adopting a more protectionist attitude towards foreign trade.

Despite the maintained, weak dollar condition, the deterioration of the market sentiment may, in turn, depreciate the Polish currency, which is particularly sensitive to negative changes in market sentiment. Moreover, today's statement and press conference (4.00 p.m.) after the two-day meeting of the Monetary Policy Council (MPC) may also weaken the zloty. Both, the statement and the conference may be relatively dovish, if the new macroeconomic projections show a flatter inflation path. This will increase the chance of keeping interest rates for the next year, which may lower the growth potential of the zloty.

Tomorrow's preview

The most crucial event scheduled for tomorrow will be the statement and press conference from the European Central Bank’s two-day meeting. It is almost certain that interest rates and the asset purchase program will remain unchanged. However, the market attention will be focused on whether the ECB will change something regarding the future level of interest rates.

Although the closing date of the asset purchase program will not be announced (it would get the strongest market reaction), the ECB may slightly modify the message. As a result, the statement could turn out to be relatively neutral given the dovish minutes from the previous meeting. On the other hand, Mario Draghi's (President of the ECB) speech may be an important part of the conference regarding the recent announcement of the introduction of customs duties by the US and the European Union's potential response.

Customs wars may hamper inflation and economic growth. The recent fluctuations in the share and currency markets have been caused mainly by fears of a higher level of protectionism. Therefore, Mario Draghi's speech on this issue may cause some significant movements in the euro exchange rate.