fot. Exchange rates for major currencies (EUR / PLN, USD / PLN) are falling – Central and Eastern European currencies (including zloty) are getting stronger in the foreign exchange market!
Market sentiment continues to improve. Investors have recovered from the shock of Russian aggression and sanctions. Some are also counting on a quick end to the fighting thanks to some softening of the negotiating positions of Russia and Ukraine. Yesterday’s Fed decision as well as new expectations did not surprise currency markets, while the jump in interest rate expectations for 2023 translated into an increase in long Treasury yields. Some investors took advantage of this moment to take profits from the position when the EUR/USD fell. As a result, the EUR/USD reached more than 1.10, the highest level in a week. The improvement in market sentiment also allowed the Central and Eastern European currencies to strengthen. The EUR/PLN exchange rate approached 4.65.
In the underlying debt markets, we have seen further increases in yields, about 4 basis points in the case of US and German 10-year bonds. There was further consolidation in the domestic debt market. There was further tightening in asset swaps, but there was also a lowering of the NBP trajectory. The 10-year bond yield is down about 15 basis points – the lowest levels in more than a week.
Increase EUR/USD and yields in core markets
At the end of the week, the EUR/USD is likely to test the recent highs around 1.11. The chances of a breach of this level, from our point of view, are great. The Fed’s message has been hawkish, but at the same time panic in the markets is declining, so the factor that traditionally rewards the dollar is disappearing. Also, we don’t expect data to be released at the end of the week to help the greenback.
See also: Exchange rates 17/3: The dollar jumped to a six-year high. Big drops on the euro – the Polish zloty is rising!
In our opinion, the EUR/USD level, corresponding to the path of the Fed and ECB rates quoted by the market, is around 1.12. We believe the pair will reach that level with the end of the conflict in Ukraine. However, we don’t expect the rate to rise significantly this year. The European Central Bank, despite the fiscal impulse in the European Union approaching, is likely to decide to raise interest rates as soon as possible at the end of this year. In turn, the Fed’s rhetoric suggests that it may speed up the normalization of its policy.
In the core debt markets, we expect steadily higher returns, both this weekend and the better part of the year. It is clear that the demand for safe assets is weakening, along with hopes for a quick end to the conflict. At the same time, we expect an increase in expectations of rate hikes by the Federal Reserve and the European Central Bank. The Fed’s rhetoric indicates that the odds of a faster cycle of higher interest rates in the US are high. The Fed is also suggesting that it will start reducing its balance sheet soon. In Europe, on the other hand, we will face a major financial impulse, armaments, or a departure from Russian energy sources. Changes in the energy sector should also lead to higher long-term energy prices in Western economies, as well as increase inflationary pressure since the time of the pandemic. This in turn supports expectations of an interest rate hike by the European Central Bank.
See also: Urgent: The Federal Reserve raises interest rates and signals more! See how the US Dollar (USD) reacted
The strengthening of the zloty continues. TS . stability
At the end of the week, the EUR/PLN exchange rate is likely to be between 4.60 and 4.65. Market panic is quickly fading, despite media reports that Russia is moving new forces to the West. The dollar is also weakening, which helps the Central and Eastern European currencies as well. Tomorrow we will also see strong domestic data, which should support expectations of a decisive NBP rate hike. Market sentiment has improved so much that it should not be overshadowed by the geopolitical situation. Technical default of Russia remains a risk factor, for example, if it decides to pay off its obligations in rubles. Obligations are due yesterday, and there is currently a 30-day grace period. This may stop the €/PLN decline temporarily.
The appreciation of the zloty came faster than our optimistic forecast a few days ago. Recent comments give hope for the influx of financial aid to accept refugees from Ukraine. In line with the announcements of the Ministry of Finance and the National Bank of Banks, these funds will be exchanged on the market (selling currencies, buying zlotys). It overlaps with the scenario of faster increases in NBP rates. Therefore, the chances of the EUR / PLN exchange rate approaching 4.50 are increasing even in the second quarter of 22. However, there are still many possible twists and turns on the front and in Russia’s negotiations with Ukraine.
See also: The Euro (EUR) fell – the panic wave of selling zlotys (PLN) stopped!
The improvement in mood is also evident in the domestic debt market
Long-term asset swaps were just over 20 basis points above levels prior to the Russian aggression. In our opinion, more pressure can be expected at the beginning of the week. However, we also expect trade-offs to increase again. We are counting on positive surprises with tomorrow’s local data and increased expectations of a hike in NBP interest rates. The risk distribution suggests that TS returns will remain sideways in the coming days, despite likely higher volatility.
We believe TS revenue should peak this year at the start of Q2 22
The market is already pricing in very high target NBP rates. However, at the same time, it is expected to decline rapidly. However, in our opinion, it will be kept at a high level for much longer. Europe is waiting for a major financial boost to armaments or a departure from Russian energy sources. In the country, there will also be living costs for refugees. This means maintaining the demand-driven, pro-inflationary GDP structure.
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