A shift in the trade negotiations? (Afternoon analysis 18.11.2019)

The sentiment worsens significantly in the second part of the day after the negative reports on international trade, which strengthens the dollar's depreciation. The EUR/USD exchange rate is above 1.1080. The zloty is still slightly weaker in relation to Friday's closing, but the weaker dollar should prevent the Polish currency from a deeper depreciation.

EUR/USD pair is getting close to 1.11

The positive sentiment in the morning changed quite quickly. Eunice Yoon, a CNBC correspondent in Beijing, wrote on Twitter that the sentiment in Beijing regarding trade negotiations became pessimistic when President Donald Trump did not announce the withdrawal of duties. The negotiation strategy is now to be based on talks but also on waiting for the impeachment process and elections in the USA (in November 2020).

Other sources did not confirm the information, but it considerably reduced the appetite for risky assets. The US futures moved from historic records, and the beginning of the trading session on the New York Stock Exchange was already negative. As a result, we also observed an increase in demand for safe havens, including gold, silver, the Swiss franc and the yen.

There are no details of what the first-phase agreement between China and the US might look like. The negotiations, which are taking longer and longer, may cause impatience among investors. As a result, it is no surprise that such negative information, even though it comes from unofficial sources, has a significant impact on the market. The Chinese side could potentially use the impeachment process as an argument to strengthen rhetoric. This could harm sentiment on the broader market, as we are observing today.

In the afternoon, the dollar depreciated as a result of the information provided by the CNBC correspondent. The EUR/USD quotations exceeded 1.1090 in an hour and a half after the opening of the New York Stock Exchange session, reaching 11-day highs. However, only last week the dollar was appreciating when it seemed that the first phase of China's trade agreement with the US would be greater than estimated by economists. The weaker than expected macro data from the US economy last week and today's negative reports on the trade agreement reduce the probability of a significant dollar appreciation. On the other hand, today's events show how quickly market sentiment can change due to new information about the agreement between the two powers.

The deterioration of the market sentiment did not positively affect the zloty's basket. The Polish currency was slightly weaker in the morning, and this trend also continued in the afternoon. The EUR/PLN exchange rate exceeded 4.29, although the globally weaker dollar caused the USD/PLN to fall below 3.88. The supply pressure on the US currency should support the stabilisation of the zloty during the rest of the day if we do not observe significant drops in the main market indexes in the USA.

Tomorrow's preview

The macroeconomic calendar scheduled for Tuesday does not include any events that could significantly affect the main currencies' quotations. The stabilisation will remain the baseline scenario for tomorrow. However, the main factor that the market lives on is the negotiation and potential agreement between China and the USA. Unexpected negative information coming about this issue could strongly worsen sentiment, affecting, among others, equities and currencies of emerging countries, including the zloty.

However, an empty macroeconomic calendar at the beginning of the week does not mean that the week is going to be somewhat uninteresting. Tomorrow in the US Congress the testimony on the impeachment of the US President Donald Trump will start. Moreover, the statement of Gordon Sondland, the US Ambassador to the European Union, which is scheduled on Wednesday, is worth noting. He was supposed to warn one of the Ukrainian officials that his country would not receive military aid if the President of Ukraine did not make a public commitment to open proceedings against Joe Biden, Trump's rival in the forthcoming presidential elections. As long as the Republicans are standing by President Trump, the impact of the impeachment process on the market is severely limited. However, if Sondland's testimony suggests that Trump could lose the support of some Republicans, the sentiment on the market could worsen (i.a. because China could adopt a more confrontational stance in trade negotiations).