Can we say that the trade agreement is a done deal? (Daily analysis 31.12.2019)

The Chinese industry is developing at a pace that exceeds the expectations of economists. Information from several sources announces an imminent trade agreement between the USA and China. The EUR/USD exchange rate is the highest since August. The zloty is slightly weaker than the euro or the forint, but the dollar is still somewhat below 3.8 PLN.

Chinese economy - there are reasons for optimism

Data on December's PMI in China were published at night CET time. The industry index remained unchanged at 50.2 points, which turned out to be 0.1 points higher than expected, and export orders increased for the first time since May 2018. The PMI index for the services sector fell slightly below expectations - 53.5 pts vs the market consensus of 54.2 pts. Still, a good reading of the industry and the subindex of orders, in particular, may indicate stabilization of the expected slowdown in the Chinese economy, whose GDP growth pace next year is likely to fall below 6% year-on-year.

This is good news for the Chinese economy, especially since yesterday evening information was received about the possible signing of the first phase of the US-China trade agreement in the coming days. The Bloomberg first announced that China's Deputy Prime Minister Liu He will be in Washington on Saturday. It immediately sparked speculation that both sides would sign a formal agreement. The China Morning Post newspaper, citing a source close to negotiation, indicated that the signatures would be the purpose of the visit. Last night, Peter Navarro, director of the National Trade Council at the White House, added that signing the agreement is a "done deal" and it is a matter of days or a week. This has not caused in the market a significant positive response, but confirming the first phase of the agreement in writing will eliminate some uncertainty, given the returns so far and the protracted negotiations on this issue (over a year).

Although there were no strong increases in the equity market, another day of growth was observed for the euro/dollar valuation. The EUR/USD exchange rate rose to about 1.1228 around the midday, setting the new highest level since the second week of August. From a technical point of view, the main currency pair is also increasingly above the significant 200-day moving average (today at around 1.1142), which may also increase the supply pressure on the dollar. The US currency is weaker and weaker and not only to the euro. The dollar index (DXY), which measures its strength to the six major currencies, fell by 0.3% around midday in relation to Monday's closing and to its lowest level since the end of June (approx. 96.1 points).

Zloty slightly below in red

Given the weak dollar, the zloty remains stable during the last trading day in 2019. Around midday, the Polish currency depreciated, but this was a very limited decrease, by about 0.2% in relation to the euro or the forint, and falls within the ranges observed in previous days. Due to the continued downward pressure on the dollar, the USD/PLN exchange rate remained below 3.80. However, in this currency pair, even greater fluctuations are possible if the EUR/USD exchange rate is subject to greater volatility in the afternoon. The GBP/PLN exchange rate returned above the 5.00 limit, which is also a result of the recovery of part of the post-election losses of the pound, which today grew by about 0.4-0.7 percent in relation to major currencies. The GBP/USD exchange rate exceeded the 1.32 level for the first time in two weeks. There are no significant events or macroeconomic publications later in the day, although a slightly higher than expected reading of the US consumer confidence index from the Consumer Board (expectations of 128.4 points) may slightly support the dollar at the end of the day.