Exchange rates 11/04: The dollar has risen dramatically

Friday’s session was not filled with significant fluctuations in the Polish currency, which translated into the end of the week at the exchange rate of EUR / PLN at 4.63, similar to the previous week. The exchange rate of the US dollar against the Polish zloty increased during the week by 0.06 Polish zloty to the level of 4.25 due to the drop in the euro / US dollar to below the level of 1.09.

The calendar of macroeconomic releases on Friday was relatively poor, and the minutes of the March MPC meeting were of a historical nature. Council members see a negative impact on economic activity in Poland in connection with the war in Ukraine, and some see a further slowdown in GDP growth than the central NBP forecast indicates. For the zloty, the important factor will be the consistent actions of the board to counteract extremely negative real interest rates. In the short term, we assume that the EUR/PLN price will remain close to 4.64 and the USD/PLN price will remain above 4.20.

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In the core markets, we saw additional dollar strengthening, with the DXY hitting 100 points for the first time since May 2020 amid expectations of aggressively hawkish Fed policy. The EUR/USD exchange rate reached its lowest level at 1.0830, but the information that the European Central Bank plans to use a new instrument supported the euro and contributed to the major currency pair’s turn around 1.09. As Bloomberg reports, the European Central Bank is working on a solution that can be activated in the event of a sudden and uncontrolled increase in government bond yields, particularly in the case of the so-called peripheral countries of the eurozone (including Italy and Spain). The result of the first round of the presidential elections in France (Macron dominates M Le Pen) indicates a high probability of no change in relations with the European Union, which was seen as a neutral signal for the euro.

Last week in the domestic interest rate market saw a sharp increase in yield curves. Bids estimate the increase in the NBP reference rate at the beginning of the second and third quarter of 2022 is above 6.50%. This market reaction resulted from a stronger rate hike in April, which indicates an acceleration of the monetary policy normalization process in the US.

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After such strong changes in quotations, which we have observed in recent days, the dynamics of the increase in returns should slow down, although bond yields may continue to move towards 7%. However, information negatively affecting bond prices will be announced next week. In Poland, we will know the final inflation reading for March (it cannot be ruled out that the Central Statistical Office will revise its flash estimates upward), and the core inflation for March may turn out to be above 6.7% in February on an annual basis. Continuing inflationary pressure is also likely to be confirmed by the March inflation release in the US, which is expected to rise 8.3% year-on-year. Given that the post covers the March increase in commodity prices, there is a risk of a surprise higher than consensus (similar to Europe). Such information, combined with strong data from the US labor market, increases the likelihood of a more aggressive monetary policy tightening, which was confirmed by the Federal Reserve in the last minutes.

Another important risk factor for the market will be the European Central Bank meeting on Thursday. Its representatives maintain moderate rhetoric, emphasizing the risks of weakening economic growth and anticipating a return of inflation to the 2023 target. However, inflationary processes are more dynamic than expectations and there is a disproportionate risk on the part of the tightening of rhetoric that increases the likelihood of a monetary response already in the second half of 2022.

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