At first glance, the end of this year seems fraught with geopolitical risks. However, if viewed through the prism of financial markets, there is nothing alarming happening and the climate for risky assets remains beneficial. The Polish zloty is also benefiting from this environment, with invaluable support from the Polish Monetary Policy Council (RPP).
Wherever one looks, risk is there
Media headlines in recent days and weeks have been filled with sensational reports from around the globe. Endless considerations about what will be brought by the new administration in the White House. A record short state of emergency in South Korea, which nearly led to the impeachment of the president. Presidential elections in Romania, which have turned into a mockery of the democratic process. Ongoing protests in Georgia following the victory of the pro-Russian party that wants to divert the country from the path of the European Union. The sudden and surprising fall of the Assad regime in Syria, which could further ignite the situation in the Middle East. The end of the ruling coalition in Berlin and the expectation of a new political deal in Germany. The fall of the French minority government and the lack of a budget in the second largest economy of the EU, without the possibility of holding elections for several months. And finally, China escalating tensions around Taiwan. There is virtually no day without at least worrying news coming from somewhere. However, this is increasingly being ignored by the majority of the financial market. It seems that the minds of investors are now more governed by the calendar, that is the usual December boost in sentiment known as the Santa Claus Rally, and on the other hand the expected interest rate cuts by the major central banks. But we should not forget about lurking risks, because if the markets decide that they need to be discounted, it can be a painful lesson.
Fighting to keep the Rally
For now, December trading is largely dictated by the slogan “party on, there are no risks”. We see this at the opening of the week on capital markets, although the sentiment is not uniform. The turmoil in South Korea has at least affected the local market, where the Kospi index experienced a steep drop today, reaching 2.8%. Shanghai finished trading just slightly below the line (-0.05%), while Hong Kong, buoyed by the announcement of additional state aid (the Politburo agreed to greater monetary easing next year), went up by 2.7%. And finally, Tokyo’s Nikkei, which for a long time had trouble interpreting Japanese macro data (Q3 GDP +0.3%), until it finally turned slightly positive (+0.18%). The image of trading in Europe in the afternoon hours can be considered mixed, but falling indices are not in deep negatives. Milan is faring the worst (-0.24%), followed by Madrid (-0.19%) and Frankfurt (-0.1%). Amsterdam is trying to switch sides (+0.05%), whilst Paris (boosted by luxury companies, whose profits depend largely on Chinese consumers) and London are both up by 0.5%. Contracts on Wall Street indicate a slightly negative opening across the ocean, but spot trading can turn quotes in a completely different direction.
PLN Unleashes Attack
The market is almost certain about the Fed’s December cut by 25 bp. This should help American stocks (unless it has already been priced in) and hinder the dollar from mounting any counter-attack on the broad market. Thus, the EUR/USD exchange rate on Monday anchored above 1.055 dollars and is waiting for a more significant impulse. This could be provided by Wednesday’s CPI inflation readings in the US for November (year-on-year inflation is expected to jump to 2.7% and the core index to stick at 3.3%), which even if they do not affect the chance of a cut next week may still distort in the longer term (currently the market is approaching the expectation of 4 movements within a year). Along the way, however, already this Thursday, the ECB is likely to cut by 25bp. In theory, this should not support the position of the common currency, but this decision is even more priced in and again prospects may turn out to be more important before Christine Lagarde’s press conference. The Polish zloty, riding the market’s risk on trend and gaining support from the RPP, and particularly from the NBP President, is taking full advantage. If the major central banks continue the cycle of cuts and the domestic Monetary Policy Council maintains its strict policy, the zloty will stay strengthened via the channel of interest rate differentials. On Monday, before 3 pm, the euro exchange rate is looking increasingly towards 4.25 zlotys, the dollar exchange rate is approaching 4.02 zlotys (trying to establish monthly lows), the franc exchange rate is breaking 4.58 zlotys, and the pound exchange rate is close to 5.14 zlotys.
Author: Adam Fuchs, currency analyst at Walutomat.pl
Source: https://managerplus.pl/rynki-ignoruja-geopolityczne-ryzyka-a-zloty-korzysta-z-jastrzebiego-wsparcia-rpp-43699
