Zloty starts with falls (Afternoon analysis 12.03.2018)

The Polish currency started the week in a slightly worse condition. Its growth potential has been limited by internal factors. Tomorrow's data on consumer inflation in the US will be important both for the dollar and zloty.

Weaker zloty

The first trading day was not positive for the zloty. The Polish currency lost in relation to most major currencies - the euro oscillated around 4.20 PLN, and the dollar almost 3.42 PLN. A slightly stronger dollar today was observed, which most often translates into a negative impact on the whole zloty basket, just like the other currencies of emerging countries. Although Friday's data from the US labour market indicated reduced pressure on inflation, significantly exceeding market expectations the growth of employment in the non-farm sector had a positive impact on the sentiment in the market.

Already at night, the main Asian indexes clearly appreciated, similarly to the vast majority in Europe (about 3.00 p.m.). However, good market sentiment was not enough to support the zloty. Although this has been rare in the recent past, the zloty was weakened by internal factors.

The dovish statement from the Monetary Policy Council practically excludes rate hikes this year (and evokes greater doubt on the increase in 2019) and recent data from the Polish Central Statistical Office on foreign trade turnover indicated a second consecutive month of the deficit (January), which could also be a result of the still relatively strong zloty (weaker export).

In the following hours, there are no significant macroeconomic publications that are scheduled, and market attention has probably already shifted to tomorrow's data from the US. If the dollar continues to remain stable (EUR/USD close to 1.23) and the US session does not result in worsening sentiment, the zloty should oscillate around the current levels. Dollar appreciation or worsening market sentiment, with internal weakness, could weaken the zloty and push the euro above 4.21 PLN, while the dollar would be close to 3.43 PLN.

Tomorrow's preview

February's report on Consumer inflation (CPI) for the US by the Bureau of Economic Analysis may be the most important publication this week. The market consensus assumes the readings of the headline inflation index and core inflation indexes (excluding energy and food prices) to be similar to those from January, i.e. 2.1% and 1.8% year-on-year respectively.

After Friday's labour market report, which showed slower than expected wage growth, and at the same time limited pressure on inflation, the market is likely to be mainly focused on tomorrow's report. If core inflation (better inflation measure in the future) turned out to be lower than expected, we could observe a continuation of good market sentiment as it was seen following Friday's data.

Exceeding the consensus by 0.1 percentage points (or more) may increase the probability of monetary tightening in the USA. Rising yields on the US government bonds could, in turn, have a negative impact on market sentiment by increasing aversion to more risky asset classes. Under such circumstances, zloty quotations may be particularly vulnerable.

Although the biggest movement can be observed on the USD/PLN pair, the whole zloty basket may depreciate. Given the dovish message from the Polish MPC meeting, zloty growth potential may be limited, while the downward potential of the zloty may be slightly higher.