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Daily analysis 27.01.2017

27 Jan 2017 12:47|Bartosz Grejner

A deterioration in relationship between the USA and Mexico may appear negative for trade and increase prices in the United States. However, the dollar’s reaction to the policy of the new American administration is positive. The zloty anticipates the GDP growth reading.

Dollar and Mexican peso

A deterioration in the relationship between the USA and Mexico remains the main event in the market. Yesterday, President Donald Trump tweeted that NAFTA is unilateral because the American deficit in trade with Mexico is at the level of 60 billion dollars. He also added that if Mexico does not want to pay for the wall across the Mexican-American border, the forthcoming meeting between the presidents of both countries should be canceled. The reaction from the Mexican President, Enrique Nieto, was almost immediate. The meeting between the American and the Mexican president was promptly canceled.

The perspective of the deteriorating relationship between these countries caused a rapid depreciation of the Mexican currency. According to Bloomberg, the White House’s spokesperson, Sean Spicer, said that imposing a 20% tax would, “easily pay for the wall just through that mechanism alone.” This statement was most likely one of the main factors that caused the dollar’s depreciation last evening. The EUR/USD was pushed from 1.07 to 1.067.

However, CNBC points out that Spicer explained later that this will not be the method to pay for the building of the wall. In his opinion, there are many ways to cover this multi-billion dollar investment. However, such a tax will most likely be an element of a complex plan to change company taxing. This should bring benefits to American companies, and especially to exporters (who will not use imported goods to create their final products).

In the short-term, the border tax solution may strike the automotive sector in particular. This is because American companies have been producing a majority of vehicles in Mexico. There is also a risk that the largest American commercial networks, which import relatively less expensive products from Mexico, will increase prices due to higher import costs. Spicer also claimed that this is the analysis of costs and the benefits that consumers will have to bear because they have been paying for an influx of illegal immigrants (increased expenses for border protection, border guards, etc.).

However, the appreciation on the dollar clearly decreased this morning. The EUR/USD went back to the level of 1.07 and the USD/JPY went below 115. Currently, investors should focus on the forthcoming data regarding the American GDP Growth for the fourth quarter, which will be published today at 16:30. This index’s result for the third quarter eventually appeared to be 0.9 percentage points better than initially estimated. The market consensus regarding the fourth quarter of 2016 is at the level of 2.2% QoQ. If this reading is slightly higher, this would support the dollar (which seems to react positively to the new administration’s economic policy) and push the EUR/USD below 1.06.

Positive condition of the zloty

We have been observing a relatively positive condition for the zloty over the course of another day. The event that may increase volatility in the market is today’s reading from the Bureau of Economic Analysis (BEA) regarding the American GDP. However, taking the recent events related to the American market into consideration, this data will only impact the zloty in the context of its relation against the dollar. Nevertheless, if the data is significantly inconsistent with the market consensus, this may impact the entire PLN basket.

The zloty has recently been strong against the euro, as well as against the Hungarian forint. The EUR/PLN is currently at its lowest level in more than two months (below 4.34) and the PLN/HUF is nearing its five-month maximum. How much longer will this trend be sustained? We will find out on Tuesday, when the Polish Central Statistical Office will publish the Polish GDP data for 2016.


27 Jan 2017 12:47|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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