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The euro fell and the dollar fell! Will the latest macro data cause turmoil in the currency market? Dollar (USD), Euro (EUR) and Zloty (PLN) in Forex

The euro fell and the dollar fell!  Will the latest macro data cause turmoil in the currency market?  Dollar (USD), Euro (EUR) and Zloty (PLN) in Forex

In recent months, we have witnessed a strong rise in the prices of mineral fertilizers of a global nature. The World Bank’s global fertilizer price index rose in the January-September period of this year. by 56.1%. Moreover, the beginning of October saw a strong acceleration in fertilizer price growth. The subject of the analysis below is an assessment of the impact on the trajectory of food prices in Poland.

The main reason for the increase in fertilizer prices is the recent strong increase in natural gas prices. Nitrogen fertilizer production is based on the Haber-Bosch process, which combines nitrogen and hydrogen to produce ammonia. While air is the source of nitrogen, the source of both the hydrogen and the energy needed to produce ammonia is natural gas.

As a result, natural gas accounts for 60% to 80% of the production costs of nitrogen fertilizers, which explains the sharp increase in their prices in recent months. It should be noted, however, that the demand and supply situation in the market for other mineral fertilizers remains tense, which is largely due to political factors.

Potash fertilizer prices are affected by the sanctions imposed in 2021 by the European Union and the United States on Belarus, which is one of the largest producers of potassium fertilizers. At the same time, in recent weeks, there have been more media reports that China, the world’s leading producer of phosphorous and nitrogen fertilizers, is restricting its exports in order to stabilize prices in the domestic market. These activities have been intensified due to the energy crisis observed in this country in recent months (see MACRO map on October 11, 2021).

Given the rising prices of fertilizers and the global nature of the shock, it can be expected that farmers around the world will limit their use, which will harm the efficiency of crop production.

As a result, it is difficult to expect that the upcoming season will bring a recovery to the world stocks of cereals and oilseeds, compared to the historical background. Taking into account the constantly increasing consumption of cereals and oilseeds in recent years, this will lead to an increase in their prices. This in turn means higher feed prices, and thus a further increase in cost pressure on livestock production.

Thus, the currently observed increase in fertilizer prices will contribute in the coming months to an increase in the prices of all basic food products: bread, meat, dairy products, oils and fats, eggs.

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We estimated the effect of the fertilizer shock on the food price trajectory in two steps. In the first step, we determined the effect of increasing fertilizer prices on the prices of agricultural raw materials. Next, we used the result obtained to estimate how the increase in agricultural raw material prices, due to higher fertilizer prices, would affect the dynamics Sin NSfoodNSover there. Thus, we have constructed two econometric models. The two-stage calculation results from the fact that there are lags in the effect of fertilizer prices on agricultural raw material prices and agricultural raw material prices on retail food prices.

The zloty should be positively influenced by good economic fundamentals – economists from PKO BP predict that in the years 2022-2023 the dynamics of GDP will be close to 5%. Although the current account surplus is decreasing, it should not be a negative factor for our currency, with.. Read

Strong changes in the forex market!  You should see currency forecasts for 2021/2022 - how much can you pay for 1 euro in 2022?

In the first model, the dependent variable is the agricultural commodity price index that we generated using data from the Central Bureau of Statistics and the Ministry of Agriculture. We decided to create our own indicator due to the limited usefulness of the world food price index, in our opinion, in predicting the dynamics of food prices in Poland (see AGROmapa of 16/03/2021). The weights of the individual agricultural commodities in the index were determined on the basis of the weights of the corresponding food categories in the inflation basket.

The euro fell and the dollar fell!  Will the latest macro data cause crazy changes in the currency market?  Dollar (USD), Euro (EUR) and Zloty (PLN) in Forex - 5

The dependent variables included the global fertilizer price index expressed in zlotys, a 4-month lag, and a 5-month delay in diesel oil price. Such a structure of the model reflects farmers’ costs and their impact on the purchase prices of agricultural raw materials. The model results indicate an annual dynamic increase in fertilizer prices by 10 percentage points. Percentage leads to an increase in the annual dynamics of agricultural commodity prices by 0.6 percentage points. %, without changing the other terms.

In the second model, the dependent variable is the annual growth of food prices (excluding non-alcoholic beverages) in Poland, while the explanatory variable is the commodity price index, estimated by us, lagged by 5 months.

The results of the model indicate that the annual dynamics of the commodity price index increases by 10 percentage points. Percentage leads to an increase in the annual growth of food prices by 2.8 percentage points. %, without changing the other terms. Thus, based on the results of both models, we estimate that the annual growth rate of fertilizer prices will rise by 10 percentage points. A percentage after 9 months leads to an increase in the annual growth of food prices by about 0.17 percentage points. Percentage Assuming no change in beverage prices, this means an increase in price dynamics and non-alcoholic beverages by about 0.15 percentage points. percent

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Our new track for projected food prices, published three weeks ago, takes into account the fertilizer shock that lasted through September of this year. (See Macro Map on 04/10/2021). The cumulative effect of the increase in fertilizer prices on the annual growth of food prices in the fourth quarter of 2021 was about 0.6 percentage points. percent

In the first half of 2022, fertilizer prices will boost food price dynamics by another 0.6 percentage point. Assuming a correction in global fertilizer prices in the following months, in the second half of 2022 (see below), the impact of higher fertilizer prices on the food price trajectory will begin to diminish.

Our forecast assumes an increase in annual price dynamics in 2022 compared to 2021 in all major food categories except beverages, as next year we will deal with a higher base impact related to the sugar tax introduced in January 2021. This is consistent with the assessment that the fertilization shock will have The effect on both plant and animal production prices will, therefore, be reflected in all major food categories.

The euro fell and the dollar fell!  Will the latest macro data cause crazy changes in the currency market?  Dollar (USD), Euro (EUR) and Zloty (PLN) in Forex - 3

The marked acceleration in fertilizer price growth observed in the first half of October poses an upside risk to our scenario. However, taking into account the very high volatility that has been recorded recently in gas prices, as well as the significant importance of non-market factors affecting fertilizer prices (including Anwil’s recent decision to cut fertilizer prices by 30% or the European Commission’s announcements regarding measures potential governments to take to reduce gas prices) It is currently very difficult to estimate the impact of recent market changes on food prices.

The euro fell and the dollar fell!  Will the latest macro data cause crazy changes in the currency market?  Dollar (USD), Euro (EUR) and Zloty (PLN) in Forex - 1

As a result, in our base scenario, we assume that the coming months will bring about a correction and a fall in fertilizer prices, although they will remain at a high level. As a result, despite the upward risk factors related to the increase in fertilizer prices in October, we still maintain our expectations, in line with the growth rate of food and non-alcoholic beverages prices will rise to 4.4% YoY in 2022 versus 2.8% in 2021. This supports our inflation scenario, according to which CPI inflation in Poland will rise to 4.9% y/y in 2022 compared to 4.8% in 2021 (see Macro Map of 04/10/2021). One of the upward risk factors in our scenario is the government’s latest plans to increase excise taxes on alcohol and cigarettes in 2022, which were not included in our projections.

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The results of economic surveys in the euro area in the focus of the market

EURPLN fell last week to 4.5674 (0.7% strengthening of the zloty). Over the past week, we have seen an increase in the zloty, which was supported by a decline in global risk aversion reflected in the decline in the VIX Index. Domestically, investors’ expectations of further monetary tightening in Poland remain a positive factor for the Polish currency exchange rate.

Due to the drop in global risk aversion, the dollar weakened against the euro last week. The September FOMC meeting minutes released on Wednesday evening did not provide any significant new information on the prospects for monetary policy in the US, and therefore had no significant impact on the zloty exchange rate.

The euro fell and the dollar fell!  Will the latest macro data cause crazy changes in the currency market?  Dollar (USD), Euro (EUR) and Zloty (PLN) in Forex - 2

The data from the Chinese economy released this morning (GDP, Industrial Production, Retail Sales) is somewhat negative in relation to the zloty exchange rate. This week, the market will focus on the publication of flash PMIs for the most important European economies, which will not have a significant impact on the zloty if our expectations are met in line with the market consensus.

On the other hand, local data on retail sales may contribute to a slight depreciation of the Polish currency. Other data releases from Poland (industrial production, employment and average wages in the enterprise sector) and the United States (industrial production, start-up of construction, building permits, sale of homes in the secondary market) will not have a significant impact on the exchange rate of the zloty.

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