A step towards protectionism? (Daily analysis 07.03.2018)

The departure of the Head of the Council of Economic Advisors from the White House worsens the global sentiment and increases the possibility of trade wars. Has Lael Brainard become more hawkish? The zloty weakens slightly after reports from the USA, but the EUR/PLN pair remains below the 4.20 boundary.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:15 p.m.: ADP data on employment in the US labour market (estimates: 200k),
• 4:00 p.m.: Press conference after March's MPC meeting. Statement publication and some of the macroeconomic forecasts from the latest report on NBP inflation.

Sentiment swing

Reports released during the night about the resignation of Gary Cohn, President of the Council of Economic Advisors, increased the speculation scale about White House movements, the possibility of it moving towards a more protectionist approach to foreign trade. There is a growing risk that the tariffs' issue on steel or aluminium may only be a starting point for wider action towards the final reduction of imports and the US trade deficit.

Currently, the question arises as to whether these measures are negative or positive for the dollar? In the long term, this is probably not good information for the US currency. The greater amount of restrictions on trade is likely to result in higher price increases for consumers, lower purchasing power, lower economic growth potential and, ultimately, the need for a more accommodative monetary policy (to stimulate the economy) and an outflow of capital rather than inflow to the US.

In the short term, the situation may be more complicated. Reduced import translates into a smaller deficit on the commodity account balance (positive for the USD). Higher prices may signal faster than slower rate hikes (positive for the USD). The risk of slower growth may cause a return of capital to the US which was invested abroad and may also be beneficial to the dollar.

Brainard moved over to the hawkish side?

In the context of the detailed discussion on personnel changes in the White House and fears about the condition of foreign trade, the market witnessed an interesting speech by Lael Brainard, a member of the Board of Governors of the Federal Reserve.

For a long time, the Fed representative held a dovish stance. In most cases she was in favour of a smaller number of rate hikes due to the uncertain fate of inflation. Therefore, her speech at the University of New York can be seen as a turning point in her approach to monetary policy.

The text was mainly based on a comparison of the 2015-2016 situation, when the decision to keep interest rates unchanged was justified (strong dollar, no inflationary pressure, few investments) with the current situation - the acceleration of growth, fiscal stimulation, a weaker dollar and probably increasing chances for inflation returning close to the target. It cannot be ruled out that Brainard will move towards the more neutral or even slightly hawkish part of the committee and support the idea of three or even four rate hikes this year.

Slight zloty weakening

The zloty incurred some losses today. These decreases were limited, but the EUR/PLN pair moved to the 4.19-4.20 range (close to this year's records). The zloty weakening is more visible in relation to the forint, where the depreciation reached about half a percent since the beginning of the week.

All issues connected with any major foreign trade disturbances are negative for Poland due to the openness of its economy. Larger disruptions in trade between the EU and the US may also be harmful for the Polish economy.

The weaker zloty condition in relation to the forint may be a result of expectations towards the outcome of today's MPC meeting. A flatter inflation path is to be seen (similar to the one from last July rather than November) together with faster economic growth. This may give the MPC a signal to suggest that there will be no change in monetary policy over the next 12 months. This would be a negative signal for the PLN.