Zloty under pressure exerted by the dollar (Daily analysis 20.02.2020)

Higher-than-expected industrial production in Poland does not support the zloty much. Today, the EUR/PLN exchange rate exceeds 4.28, reaching its highest level in over two weeks. However, this may not be the end of the depreciation of the Polish currency.

Production is growing more than expected

A stronger dollar affects the zloty's quotation. For the next day in a row, the zloty lost in relation to the main currencies. This was not changed even by slightly better than expected data from the Polish economy. According to the Polish Central Statistical Office (GUS), industrial production increased in January by 4.5% annually, i.e. by 1.5 percentage points above expectations. However, the publication of data from the industrial sector had a very limited impact on the zloty. Today, the EUR/PLN quotations increased above 4.28, i.e. to the highest level since February 4, when the exchange rate last time exceeded 4.30.

The global appreciation of the dollar also causes a strong growth of the USD/PLN pair, whose exchange rate approached 3.97 today, also setting the highest level since October last year. There was a slight change compared to Wednesday's closing, in the case of the GBP/PLN, the weakness of both currencies made their quotations on an equal level today. The British currency also came under supply pressure despite higher than expected retail sales growth in January (excluding fuels and vehicles: 1.2% year-on-year vs expectations of 0.8%).

Few arguments to support the Polish currency

The zloty's weakness may yet increase. Positive sentiment on the equity market and indexes still close to historical records support the Polish currency, despite the threats of the coronavirus and its impact on the economy. In this respect, the equity market is, to some extent, independent of, among others, the bond market or strongly rising gold prices, suggesting increased uncertainty among investors. There is a prevailing belief that central banks will protect the market and provide even more liquidity if the impact of the virus on the economy is stronger than expected. This currently protects the zloty against a more significant discount. Still, if sentiment in the global equity market starts to reverse, this may be the moment when the depreciation of the zloty will accelerate.

Looking at the near future, the most important for the market will be tomorrow's PMI data from the eurozone industrial and service sector. Given that this region is Poland's main trading partner, these readings will also be essential for the zloty. The data for February may show a strong deterioration in sentiment among entrepreneurs in both sectors, which, in turn, may weaken the equity and euro markets. If we add to this the growing disproportion in the condition of the US and eurozone economies, it may mean that the zloty will be further depreciated if activity in industry and services is lower than expected.