Market Summary by AFORTI: The Activity of Central Banks and Its Impact on the Global Economy

Last week brought increased market turbulence, mainly resulting from central bank activity and decisions that at times surprised the market. Notably, the Central Bank of Japan, Nichigin, decided to raise interest rates for the first time in 17 years. This change from -0.1 to 0.1 signifies that the highly restrictive bank has recognized the recession's specter has begun to recede.

The second country where the central bank surprised the market was Switzerland. Interest rates were cut by 25 basis points to 1.5%. The market was taken aback as analysts had predicted the first possible cut for June or July. However, the central bank decided to make the changes early to stimulate economic growth, indicating that inflation had slipped below 2%. With GDP growth assumed at 1% and inflation just below 1.5%, such a decision was very much justified. Moreover, it also opens up expectations of further interest rate cuts in the first half of 2024.

Of the other decisions, the Bank of England also made a decision. Here, too, there was no surprise, and the base rate is still 5.25 per cent. Admittedly, CPI declined in February to 3.4 vs. 4 per cent y/y in January, but cautiously, further readings confirming a sustained downward trend in inflation will be important.

In the Eurozone, the important message came from Wednesday's press conference by Christine Lagarde, who confirmed that interest rate decisions would be based on June data. The market perceived this statement as an announcement of the first rate cut in Euroland, but on the other hand, the statement left no doubt that further cuts would be verified by incoming data, which may not necessarily result in the expected reductions of a total of 75 basis points in 2024.

From Poland, one of the main pieces of news was the abolition of zero VAT on food from 1 April. As expected, the government felt that the earlier decision to introduce a zero rate was no longer justified in light of falling inflation. On the one hand, this means potential additional revenues for the budget of around PLN 12 billion, on the other hand, inflation readings will rise by 1-1.2% per annum. However, looking at food prices, a downward trend has become noticeable, which means that earlier price hikes were met with decisions to cut back on consumer purchases. Of course, we are not talking about deflation, i.e., a return to the prices of 2-3 years ago, but only a correction, which resulted from the weakening purchasing power of households. Interestingly, the rather ruthless battle between the two big retail chains "Biedronka" and "Lidl" had a significant impact on price formation. Prices were noticeably lower to the benefit of customers, and we had - probably for the first time - such direct comparative advertising of the competition, which was previously known mainly from the US market - where Coca-Cola, for example, exchanged such direct blows with Pepsi Cola. How will this further affect the performance of the two giants? Probably the financial results of both chains will be weaker for some time, but the battle is ultimately over a huge market, where clientele is counted in millions of shoppers and turnover in billions of zlotys. According to reports from the press specializing in the food market - so far Biedronka has gained. But as we can see - this is not the end of the battle - so we can expect many more twists and turns.

So let's look at our currency market and how all these central bank decisions affected our currency. After a rather strong appreciation around EUR/PLN 4.2600-4.2700, we saw quite strong activity from importers, who took advantage of long-unseen levels. The zloty lost successively and returned above 4.3000 quite quickly. We then had to deal with trading in the PLN 4.3000-4.3250 corridor, which had already been defended for quite a long time. On Saturday, we saw a rather strong jump under EUR/PLN 4.3500 - which, in light of the fact that banks were not active on Saturday, can be explained by the coup near Moscow. As you can see from the chart - the zloty quickly recovered and Monday's opening will be at the level of Friday's market close. So what can we expect in the pre-Christmas week? The zloty will probably gain value and return to the area of 4.3000 and test this strong support level again. In our view, the EUR/PLN 4.2850-4.3150 corridor is the optimal scenario for the coming days.

EUR/PLN - perspective of the last 7 days.

Looking at the US currency, the dollar against the zloty was subject to strong movements resulting mainly from volatility on EUR/USD. The zloty moved in the USD/PLN 3.9400-3.9800 corridor to close at the USD/PLN 4.0000 level at the end of the week. In our assessment, the dollar will have the potential to return below this level and move in the 3.9700-4.0000 corridor.

USD/PLN in the perspective of the last 7 days

The EUR/USD quotes mentioned earlier showed very high volatility. The EUR/USD exchange rate, which started the week at 1.0940, finally presented a gaining dollar, and the exchange rate on Friday found itself in the EUR/USD 1.0800 area. The high volatility on this currency pair is certainly a result of the statements of the heads of central banks and the issue of interest rates. In our opinion, the next few days are likely to see a consolidation of the EURO to the USD in the region of 1.0800-1.0850. It is worth noting here that Friday will be a public holiday on the main world markets, so trading on the main currencies will be heavily restricted (USA, UK, DE, CH, IT, FR).

EUR/USD in the perspective of the last 7 days

A brief look at the commodity markets. BRENT crude oil has been consolidating around USD 86/barrel. The last few days have not brought any significant signals to cause major changes. It will be interesting to look at information on upcoming US oil stocks, but it seems that these should not surprise with increases that would signal a supply glut due to the anticipated conflict.

BRENT crude oil - last month USD/barrel

Gold - after reaching an ALT (All-Time-high) or all-time high, we saw a correction. Although buying interest remains high, the market saw profit-taking. The all-time high of USD 2,200/ounce was corrected, and we closed the week around USD 60-70 lower. We invariably see potential in this bullion, and it is likely that price records will be attacked again soon.

Finally, a brief look at our stock market. After strong upward trends, we have recently seen a consolidation around the WIG 80,000-81,000. Looking at the records of stock market indices - such as the German DAX - expectations for the Polish stock market invariably remain in a "bullish" climate and in anticipation of further records.