Zloty under pressure, dollar weakens (Afternoon analysis 16.11.2018)

The US currency rapidly lost its value after an interview with the vice-president of the Federal Reserve. The zloty weakens, even though the weaker dollar protects the Polish currency against a deeper discount.

EUR/USD above 1.14

Apart from the Brexit issue and its impact on the pound, Friday's quotations were relatively calm until the CNBC interviewed the vice-president of the Federal Reserve (Fed), Richard Clarida. He stated that he does not expect a significant increase in the rate of inflation next year, adding that there are reasons for a global economic slowdown. According to Clarida, monetary policy is moving in a neutral direction.

This statement, especially relating to the latter issue, was in contradiction with the signals from the Federal Reserve regarding the possible need to increase the interest rate above the neutral level (which neither stimulates nor slows down the economy). This statement resulted in a very rapid weakening of the dollar. The EUR/USD quotations jumped from about 1.132 to 1.141 in an hour. This is the highest exchange rate of the main currency pair since last Thursday.

Such a significant and rapid increase in the EUR/USD is not only the result of an interview with the Federal Reserve Vice-Chairman. The dollar is currently being weakened by renewed fears about restrictions on international trade due to the dispute between the USA and China or the relatively low level of oil prices. Therefore, the CNBC interview could be the only element that the market needed to resume pressure on the dollar.

In the longer term, Clarida's words may change little in the monetary policy of the Federal Reserve. If the US GDP growth pace continues to exceed economists' estimates in the following quarters, and inflation remains high (or increases slightly), it may still be necessary to raise interest rates to above the neutral level to prevent the economy from overheating. This may mean that if other factors remain unchanged, the dollar could gradually recover from losses suffered in the past few days.

Today, the zloty was under pressure from the daily newspaper “Fakt” about the possible resignation of Adam Glapinski, the President of the National Bank of Poland. The Polish currency was also not supported by declines in the main European and American indexes, although before 4 p.m. a large part of the losses had been pared. The weaker dollar gave the zloty a little break. The EUR/PLN exchange rate fell from today's high of almost 4.32 below 4.31 around 4:00 p.m. If a rebound in today's EUR/USD increases is observed, the sales pressure on the zloty may appreciate again, especially as foreign investors may fear the current turmoil around the two most important financial institutions in Poland, i.e. KNF and NBP.

Next week's preview

Brexit and Theresa May's problems with supporting her plan in the UK House of Commons are likely to be the most important issue next week. This may cause large fluctuations in the pound's value, although current information is turning the balance towards a further weakening of the pound.

The next week will not be very rich in macroeconomic publications. The markets may, therefore, be significantly affected by Brexit, the trade conflict between the USA and China or Italy’s financial problems.

The zloty is also likely to be influenced by political factors. Confirming the publication of "Fakt" about the possible resignation of Adam Glapinski, President of the National Bank of Poland, could introduce significant fluctuations in the zloty's quotations. Increased uncertainty around such an important institution will not be positive for the currency, while on the other hand, the NBP president supports a very mild monetary policy, which may weaken the zloty a little. The final impact of such an event is therefore not so clear, although it is more likely that the zloty would lose in the short term.

At the beginning of the week, macroeconomic data from the Polish economy will also be published, which last month disappointed market expectations. On Monday, the Polish Central Statistical Office (GUS) will publish the changes in average wages and employment in the industrial sector, and on Tuesday - the change in industrial production in October. The worst-case scenario for the zloty would be a new failure in the form of weak data and confirmation of "Fakt" reports about the resignation of the President of the National Bank of Poland.