Last week’s decision by the Monetary Policy Council (RPP) to lower interest rates by only 25 bp. has helped limit expectations for further cuts, which has strengthened the zloty. This week, the market’s attention will focus on the parliamentary elections, which could lead to increased volatility, but in our opinion, will not drastically change the situation in the currency market.
Globally, the key issue remains the continuous growth of long-term yields on treasury bonds – in the spotlight are again the United States. This time, the increase in yields did not contribute to the appreciation of the dollar, which recorded declines against most currencies, even despite impressive, Friday’s NFP (Non-Farm Payrolls) data. The main exceptions were commodity currencies, weakened as a result of falling commodity prices – mostly crude oil. The aforementioned strong NFP report suggested that the US economy may not be slowing down. On Friday, markets again priced at a 50% probability of an additional interest rate hike by the Federal Reserve, increasing concern in fixed-income markets (however, this probability is quite volatile and is heading down today).
The weekend attack by Hamas on Israel represents another source of uncertainty, which will be felt in the markets mainly through rising oil prices and their accompanying inflationary pressure. However, the most important question remains whether the biggest treasury bonds sell-off in US history will continue, pulling down risky assets and supporting the dollar. In this context, the US inflation report for September (Thursday 12.10.) gains additional significance. Any signs that price pressure continues to normalize would be well received by the markets and could cause a significant rebound in the euro.
Zloty was the best performing currency in the region last week. This can be attributed, at least in part, to the decision of the National Bank of Poland (NBP) and signals coming from there. However, economists’ consensus expected a cut of 25 bp., while we and the market thought a 50 bp. move was more likely. As a result of the decision, the FRA curve, illustrating expectations regarding the WIBOR rate in the future, has increased. President Glapiński’s speech on Thursday further supported suspicions in the market that the bank has little appetite for aggressive actions. This could limit one of the biggest threats to the Polish currency.
On Friday (13.10), we will find out the revised CPI inflation reading and data regarding the current account balance and trade in September, but the focus will probably be on the last phase of the parliamentary elections in Poland, which will take place on Sunday 15.10. So far, market behavior does not suggest that there will be significant fluctuations as a result of these elections. Nevertheless, we believe that a majority win by the ruling party Law and Justice (PiS) and the far-right Confederation could put pressure on currency. Higher support for opposition parties: Civic Coalition, Third Way and New Left (which can form a coalition) could, in our opinion, provide some support for the currency.
We believe that investors will view the results of the parliamentary elections through the lens of economic policy (which, regardless of the result, is unlikely to deviate too far from the status quo), as well as the rule of law and relations with the EU – in this context, an opposition victory offers hope for improvement. Taking all of this into account, an opposition advantage could also be seen as increasing the likelihood of receiving EU recovery funds. It is worth noting that the future government may not be formed immediately. A significant delay in this process – or even new elections – poses a separate risk for the currency.
Despite the further rise in US Treasury yields and poor retail sales results in the Eurozone in August, last week’s resilience of the common currency gives some hope that the fairly negative prospects for the European economy have already been priced in at current levels. Retail sales in August contracted by 1.2% compared to the previous month, which is the largest drop since December. These figures, albeit late, show a worrying trend in activity.
Minutes from the last meeting of the European Central Bank will be released on Thursday (12.10). ECB members’ messages last week were very dovish, reducing the probability of further monetary tightening. We expect the minutes to carry a similar message, which would do little to support the beleaguered common currency.
The US economy appears to have recovered from the fastest rise in yields in its history. Treasury bonds are still experiencing a selloff, while markets are getting used to the possibility of maintaining interest rates at 5% levels for a long time. Last week’s key point was the publication of the NFP report, which confirmed the positive tone of more frequently published data, such as job openings and weekly unemployment claims. The average wage growth fell and the unemployment rate surprisingly remained at the same level. The number of net new jobs nearly doubled economists’ expectations – at 336,000 last month.
This week, we will focus on the inflation report for September (Thursday, October 12th). The bond markets with their frayed nerves may not react well to an upward surprise, but a relatively mild decline is expected which would affirm the trend desired by the Federal Reserve.
In a week without any significant data, the pound performed quite well, strengthening against the euro and the dollar after weeks of losses. A lack of significant news from the UK over the past week meant that pound trading largely depended on information from outside the country.
The authors of the article are Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak– analysts at Ebury.
