The zloty remains stable and expectations of an announcement of interest rate cuts are premature, according to Ebury analysts: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia and Michal Jóźwiak.
Market sentiment has improved, but this has not significantly affected the Polish zloty, which is characterized by exceptional stability. This week’s MPC meeting is unlikely to change that – in our view, it is much too early to announce a reversal of the hike cycle. Fading concerns about the banking sector contributed to the strengthening of risk assets last week. The lack of new news is very positive for investors, as the market seems to increasingly agree that the recent bank failures were due to individual factors rather than systemic problems. The dollar, on the back of growing risk appetite, weakened against every major currency except the Japanese yen. The rises continued in emerging markets, led by Latin American currencies. The latter are doing best so far in 2023, confirming our positive bias toward them.
After the recent turnaround in the banking sector, market attention will once again focus on macroeconomic readings. With Easter coming up, there won’t be many of them, but Friday’s (7.04) report from the US labor market (non farm payrolls, NFP) will certainly play an important role. It is worth noting that most stock exchanges will operate only until Thursday, 6.04. Looking a little more broadly, the market reaction to the huge OPEC+ oil production cut announced over the weekend seems interesting – although crude prices momentarily rose, so far, commodity currencies have seen only modest increases. Greater appreciation appears to be limited by concerns about the impact on inflation.
PLN
The appreciation of the zloty against the euro last week was modest (+0.2%), especially compared to that recorded by the Hungarian forint (+1.3%) and the Czech crown (+0.9%). The small change in this context is not negative, but is a reflection of the resilience of the Polish currency – the strengthening of many other currencies, including those mentioned above, is the result of diminishing concerns about the situation of the banking sector, which had previously hit currencies. Although CPI inflation fell in March, the data is not positive. First, the decline is mechanical (it is largely the result of a high base from last year) and does not suggest a deceleration in price processes. Second, the decline is smaller than expected (16.2% vs. consensus of around 16%). We are waiting for a sustained reduction in inflation, especially the momentum of core price dynamics – so far the data do not show this. The pre-Christmas week promises to be rather quiet. Behind us is already the publication of March PMI data for industry, which showed a minor slip in the index to 48.3 points from 48.5 points in February. Later in the week, our attention will be focused primarily on the MPC meeting. We will learn its outcome on Wednesday 5.04 in the afternoon, while on Thursday we will focus on President Glapinski’s press conference. The April meeting is unlikely to bring a breakthrough. The president will most likely speak positively about the decline in inflation, but it is hard to expect an announcement regarding the reversal of the cycle of increases. The Polish zloty should therefore react mainly to external signals.
EUR
Inflation data do not provide the European Central Bank with reasons for optimism. The core measure of inflation continues to fall, but this is mainly the result of lower energy prices, especially gas, which have been moving downward since peaking in August. The much stickier core measure hit another record high in March, with the monthly change in this index at twice the expected rate. This key measure is now roughly 3 percentage points above ECB interest rates, which virtually guarantees continued increases in the cost of money. Concerns about the banking sector seem to be fading, leaving the ECB plenty of room to catch up with the Fed in the coming months. We believe that upcoming rate hikes and news from China suggesting a recovery leave the way open for further euro appreciation.
USD
Last week brought two pieces of good news from the US economy. PMI indexes describing business activity rebounded strongly. This supports the notion that the economy is so far not giving in to concerns about the health of the banking sector by continuing to grow with a still very tight labor market. February’s PCE inflation report, the Fed’s preferred measure, turned out to be slightly softer than expected, with the main measure falling to 5%, the lowest level since September 2021. The data contributed to pronounced rallies in the U.S. stock market and a weaker dollar – reversing a trend that tends to steer funds toward so-called safe havens. This week we expect the situation to be similar – the path of least resistance for the dollar leads downward for the time being. Friday’s good NFP reading from the U.S. labor market could tip the balance toward a final 25 bp hike at the Fed’s May meeting. However, we believe that we would have to receive a lot of data significantly above consensus (especially those on wage growth) for the market to be willing to believe in another hike after May.
GBP
A modest upward revision of Q4 GDP was all that investors needed to push the pound higher against every G10 currency except the Canadian dollar. The pound has been the best performing currency so far in 2023, which can be attributed in part to the resilience of UK macroeconomic data, the insulation of the UK banking sector from external shocks, and the hawkish stance taken by the Bank of England (BoE). BoE Governor Andrew Bailey warned last week that the recent turmoil is unlikely to deter further tightening, and that another 25bp hike at the upcoming May meeting seems very likely. With each week, the prospect of recession is moving further and further away, and the pound, until recently unloved by investors, also undervalued by many measures, is reaping the benefits. This week we won’t see many releases with real potential to shake up the British currency’s exchange rate, so we expect the pound against non-European currencies to move similarly to the euro.
CNY
The yuan ended the week with little change against the U.S. dollar, but performed worse than most other emerging market currencies. The trade-weighted CFETS RMB index fell 0.5% despite some positive economic data. Last week’s NBS PMI data positively surprised, indicating a strong recovery, particularly in the services sector – the non-manufacturing PMI rose to 58.2 points, the highest level since May 2011. Today, the Caixin PMI reading for the manufacturing sector, which focuses on smaller and export-oriented companies, disappointed sharply, falling to 50.0 points. Thus, it indicated neither expansion nor contraction in activity in March. While this may tell us more about the state of external demand, it confirms the unevenness of the economic recovery. This week promises to be relatively quiet. Easter will be preceded by Wednesday’s Qingming Festival (Grave Sweeping Day). The focus will be primarily on external news, however, we will keep an eye on Thursday’s Caixin PMI for services.
Source: Ebury analysts: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia and Michal Jóźwiak and ISBnews
