The latest macroeconomic data from Poland are an argument for continuing the tightening of monetary policy in Poland. Nevertheless, the pace of interest rate increases should depend primarily on the situation in Ukraine: the better the news, the less aggressive the hikes should be, and the lower the maximum level of rates, believe Ebury analysts: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk and Itsaso Apezteguia.
The zloty appreciation last week continued. The impact of the Russian invasion of Ukraine on the markets is smaller, and the reaction to the Fed hawks resembles the implementation of the famous market maxim “buy rumors and sell the facts. Although the situation in Ukraine will still have a decisive impact on the valuation of the Polish currency and the scale of monetary tightening, in the context of behavior of major currencies, macro readings are also worth observing.
Movements in the stock market and assets last week have been overall impressive. An example of optimism permeating the market is that the European stock indices closed the week close to the levels they were at before the invasion. The Swedish krona performed best in the foreign exchange market, while the safe haven currency, the Japanese yen, was at the bottom of the G10 table. Emerging market currencies continue to gain. This applies in particular to the currencies of Latin America – both due to the fact that the economies of these countries are based on the export of raw materials, and because of the great distance from the war. It is worth noting that our favorite, the Brazilian real, is leading the charts among major currencies this year and has already gained well over 10% against the US dollar.
Apart from the news on the situation in Ukraine, this week investors will focus on Thursday’s PMI readings for economic activity in the euro zone and Great Britain. They will show the impact of the Russian invasion, so uncertainty is extremely high. Consensus expects a decline in indices, but they are still expected to show solid expansion levels. In addition, at least six members of the Federal Reserve will be speaking this week – we expect them to clarify issues related to monetary tightening. At present, it seems that the center of gravity of the planned cycle will be in its initial phase. So far, the dollar has definitely not appreciated on the hawkish Fed statements last week. Wednesday’s UK inflation report in February should show another jump to the highs in decades.
PLN
Last week saw a continuation of the appreciation of the Polish zloty, which we associate with the fact that the market focused mainly on positive signals regarding the talks between Ukraine and Russia. Investors are attracted to any favorable information, but at the same time they get used to the current situation, however tragic it may be. The zloty is reacting and should continue to react mainly to changes in market sentiment related to the war in Ukraine. Volatility is lower, the market is fairly optimistic, but uncertainty remains.
Despite the fact that, for obvious reasons, the macro data has lost its importance, it is worth noting that almost all February data from Poland from recent days showed readings higher than expected. This applies, inter alia, to all inflation readings (CPI, core, PPI) and data on wages, showing the double-digit dynamics, the highest since 2008 (11.7%).
Together with the data on the sold industrial output, which showed that it is well above the pre-pandemic trend, these readings constitute an argument for the continuation of monetary policy tightening in Poland. Nevertheless, the pace of interest rate increases should depend primarily on the situation in Ukraine: the better the news, the less aggressive the hikes, and the lower the maximum level of interest rates.
EUR
In the euro zone, things have been calm in recent days – the only readings were the now obsolete report on industrial production in January and the huge, but expected drop in investors’ expectations regarding economic growth after the shock caused by the Russian invasion. However, the latter indicator has not been particularly helpful in forecasting growth recently. It was a volatile week for the euro, but it managed to strengthen and ended it above 1.10 against the dollar.
The most important event of the following days will be the publication of the preliminary PMI readings in March, which will give a first look at the stagflational impact of the war on the European economy. In addition, ECB President Christine Lagarde and Chief Economist Philip Lane will speak this week.
USD
The Federal Reserve confirmed the expectations of an interest rate hike at each of the future meetings in 2022. The dot plot showed that FOMC members expect a total of 7 moves by 25 bp. in 2022 The forecasts for the long run were more dovish, but given their development so far, we would not place much confidence in them.
The dollar did not strengthen in the aftermath of the meeting due to two factors. The first is the general improvement in risk sentiment, which is detrimental to the dollar, which has been behaving like a typical safe haven currency since the beginning of the invasion of Ukraine. The second is the feeling of the markets that at the current level, market valuations are already high and thus further appreciation may be limited. This week it should be clarified which of these factors is decisive.
Source: Ebury and ISBnews
