Zloty may weaken (Afternoon analysis 4.12.2018)

04.12.2018 16:15|Bartosz Grejner

The dollar weakens the second day in a row - the market starts to believe more and more in the scenario of a slowdown in interest rate rises in the USA. The Polish currency stabilises, but we can observe its weakening.

The EUR/USD close to 1.14

Today, the US currency is noticeably depreciating. Although the scale was limited (at 4:00 p.m., the EUR/USD quotations increased by about 0.3% and oscillated around 1.14), movements on the US Treasury bonds were more pronounced. For the first time in more than a decade, the differences between the yields of bonds maturing in two and three and five years were negative. The difference in yields between "two-year-old bonds" and those maturing in ten years' time is still positive, but the continuation of the current decline may cause that within the next month we may observe a negative level.

This is a negative sign for the dollar, which indicates that the market expects a slowdown in the pace of monetary tightening by the Federal Reserve. This is the effect of recent speeches by the Federal Reserve members. Will this trend continue? It seems that one more hawkish speech by the Chairman of the Federal Reserve and a better than expected reading of inflation could change this situation and bring the dollar back to the appreciation path.

The zloty's fluctuation range was limited today. The better than expected data published earlier, such as GDP growth pace, wages, retail sales and industrial production, was shadowed by the lowest activity rate of the manufacturing sector (PMI) in four years and surprisingly low inflation in November. This will probably prevent the zloty from further appreciation or even weaken it slightly.

The weaker dollar supports the zloty. The value of the Polish currency against the main currencies was close to yesterday's closing levels around 4:00 p.m. - the EUR/PLN was quoted around 4.28 and USD/PLN 3.76. The return of the dollar's upward trend could, however, start depreciating the Polish currency which may be under slight pressure tomorrow due to the announcement and conference of the Monetary Policy Council.

Tomorrow's preview

At 10:30 a.m., IHS Markit will publish November's PMI of the UK services sector. The market consensus indicates an increase of 0.3 points to 52.5 points. The analogous indexes for the construction and industrial sectors, which were published today and yesterday, turned out to be better than expected. Although Brexit remains the most important determinant of pound valuation, another positive reading of the PMI index could slightly strengthen the pound.

At 11:00 a.m., Eurostat will provide retail sales data for October. Now, the market situation is slightly more in favour of the euro and against the dollar. Sales data may give an indication of consumption levels in the eurozone and a reading above 2.1% y/y (market consensus) may slightly reduce concerns about the economic slowdown in the single currency area and translate into a strengthening of the euro. However, the final effect of the data is usually limited.

At 4:00 p.m., the National Bank of Poland will publish a statement after the two-day meeting of the Monetary Policy Council (MPC). At the same hour, a press conference with the President of the Monetary Policy Council, Adam Glapinski, will also begin. Recently published data, although indicated still strong economic growth, showed much lower than expected inflationary pressure. This creates the risk of a dovish message from the MPC, which may weaken the whole zloty basket.


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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 the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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