Customs war is coming (Daily analysis 04.04.2018)

The new restrictions on foreign trade between the United States and China caused a sharp deterioration in global sentiment. Lower than expected inflation weakened the Polish currency. The EUR/PLN pair close to the 4.21 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 new payrolls in the private sector (estimates: 210k in March),
• 4:00 p.m.: ISM data from the US service sector (estimates: 59 pts).

Marked deterioration of sentiment

Significant increases in the US market on Tuesday and a calm start of the European session did not foresee such a strong decline in sentiment in the following hours. Around midday, futures contracts for the US indexes fell by almost 2%. The sharp increase in risk aversion is caused by the continued trade conflict between the US and China.

During the night, the US published a list of products imported from China which will be subject to 25% customs duty. It did not cause much of a ripple, as it was in line with earlier speculations. However, very few market participants expected such a rapid response from Beijing.

Last time, China did not react for quite a long time to the previously announced duties on aluminium and steel. Now, however, it was different. Beijing almost immediately (during the European session) revealed that it also intends to impose 25% customs duties on US imports worth 50 billion USD. These will include cars, airplanes and soya beans (12 billion USD in imports).

This rapid reaction was clearly a surprise to the markets. It was received as a signal of a significant tension on the Washington-Peking line. There is still an opportunity to avoid a full trade war, but it seems that a compromise may be more difficult to reach. The tariffs will probably not enter into force by the beginning of June, so there are about 7 weeks for further negotiations. Their hypothetical failure can clearly deteriorate the global sentiment.

In the case of the currency market's response, it still seems to be rather subdued. The dollar depreciated slightly, but its movements were relatively limited. More nervousness can only be seen in the recently weaker currencies. For example, the Turkish lira lost 0.8% in relation to the dollar and is once again close to its historical lows.

Pressure on the zloty

The Polish currency has been incurring losses since the morning. However, this is not related to custom wars between Washington and Beijing. The Polish Central Statistical Office (GUS) published a surprisingly low inflation rate for March. It amounted to only 1.3% year-on-year, with the market consensus at a level close to 1.6-1.7%.

Such low inflationary pressure (also in the context of core terms, which probably dropped further compared to February's reading at 0.8% year-on-year) means that the MPC will continue to maintain its accommodative approach, and the chances of interest rate hikes in Poland before the end of the first half of 2019 are practically close to zero. Therefore, in the following hours, the EUR/PLN pair may still remain close to the 4.21 boundary.