Zloty remains stable (afternoon analysis 10.01.2019)

10.01.2019 16:16 | Bartosz Grejner

The continuing weakening of the dollar supported the zloty. Better-than-expected initial jobless claims figures will be rather neutral to the US currency given yesterday's FOMC minutes.

EUR/USD still above 1.15

Today's session brought relatively limited changes in the market, at least until the start of trading on the New York Stock Exchange. The dollar remained weakened, which was clearly influenced by yesterday's publication by the Federal Reserve (Fed). The record of the last meeting of the Monetary Committee (FOMC) strongly suggested that no increases in interest rates should be expected in the next six months (although earlier there was even talk of a rise in March). The euro/dollar was still above 1.15, although during the session in Europe the exchange rate moved back from the peak at about 1.1570 to about 1.1516.

The US currency should not be expected to return to the appreciation path in the short term. The Fed's monetary policy will depend to a large extent on incoming macroeconomic data - mainly on inflation, GDP growth and the labour market (wages, payrolls). The concern of FOMC members with declines and high volatility on the stock exchanges suggests that this will also be a factor they will take into account. Weak sentiment on equity markets and a fall of the main indices close to the recent lows may reduce the likelihood of interest rate increases - an opposite situation on stock exchanges may in turn increase them (the risk of "overheating" the economy will return, especially with good GDP and inflation readings).

Minutes last meeting were also published today by the European Central Bank (ECB). These, however, have not brought so much emotion, as the ECB is currently not expected to do much in the context of tightening monetary policy. The current negative rates could most likely be raised once this year - and even this depends on the flow of solid data from the euro area (especially an increase in core inflation), but for the time being we are not observing it.

In the afternoon, better-than-expected data on initial jobless claims in the US were published. The number of applications filed last week fell to 216,000 and was 9,000 lower than market expectations. However, the solid condition of the US labour market is not surprising - we already had confirmation of this in the December report, published on Friday. Today's data, although theoretically positive for the dollar, should have a very limited impact on the dollar.

The continuing weakness of the dollar is still a good signal for the zloty. Today, the Polish currency has undergone slight changes. The EUR/PLN fluctuates around the level of 4.30, which is currently the starting point for deviations depending on the market situation. The relation of the dollar to the zloty is subject to slightly greater fluctuations than the euro to the zloty, although these fluctuations were not significant today - the USD/PLN remains at the bottom of the last 2.5 months' quotations, moving today between approx. 3.718 and 3.738.

The zloty, on the other hand, was stronger in relation to the franc - CHF/PLN dropped to approx. 3,806, close to the lower range of quotations in the last two weeks. However, this situation is due to the weaker condition of the Swiss currency globally today. There are still planned two speeches by Fed's representatives - Jerome Powell and Richard Clarida, but it is unlikely that their comments will change anything in the context of monetary policy. The zloty's quotations in relation to the main currencies should stabilise around current levels if we do not observe significant changes in the valuation of the dollar or bigger movements on the equity market (significant drops of the main indices in the US could strengthen the franc back).

Tomorrow's preview

The Italian statistics office will present industrial production data in November at 10:00 a.m. (CET). Data from this sector have recently attracted attention, as production in November in Germany and France, the two largest economies in Europe, has fallen significantly. A big decline in output in the next large eurozone economy (market consensus indicates a growth of 0.2% yoy) may weaken the euro, which is currently supported by optimism about trade negotiations between the US and China and a weak dollar.

At 10:30 a.m., the Office of National Statistics (ONS) will publish industrial production data for the UK in November. The market consensus for British industry also points to a 0.7% annual decline. At the same time, however, the ONS will also present November's trade balance (the consensus points to a deficit of £11.4 billion) and production in the construction sector (expected to grow by 2.5% yoy).

The level of volatility of the pound may increase around the publication time, but this data is likely to have a rather limited impact. Market attention is mainly focused on the vote in the British Parliament on the Brexit plan worked out by Prime Minister Theresa May. She will likely lose the vote, but it is important by how many votes. The scale of the failure may determine the possibility of new elections, in which case all scenarios for Brexit (or no Brexit at all) remain open. This would significantly increase the level of uncertainty, most likely also contributing to an increase in supply pressure on the pound.

In the afternoon important data regarding the US economy will be published. Important in the context of dovish signals coming from FOMC. The Bureau of Economic Analysis (BEA) will publish data on consumer inflation (CPI) in December at 2:30 p.m. After the Fed's clear easing of the stance on monetary tightening, the market currently does not expect an increase in rates in the first half of the year, hence the current weakening of the dollar. Tomorrow's data on inflation may be interesting should the core index deviate from market consensus (2.2% yoy). Although the likelihood for this is not high, an increase above expectations may slightly disturb the market's conviction that the speed of rate increases slowed down and thus strengthen the dollar.

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