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Fatal data from eurozone (Daily analysis 30.10.2018)

30 Oct 2018 12:37|Marcin Lipka

Pressure on the yuan and the threat of a trade war could have a negative impact on emerging market currencies. Weak GDP data from the eurozone is an argument for the ECB to maintain a mild monetary policy. The zloty is still under pressure. The euro is quoted at around 4.33 PLN and the dollar exceeds 3.81 PLN.

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

  • A lack of macro data may noticeably impact the analyzed currency pairs.

China issue and Mexico problem return

In recent weeks, customs duties on Chinese goods imported by the United States have disappeared from media headlines, but Bloomberg mentioned it yesterday evening. The agency claims, citing its own sources, that the US can extend duties to all Chinese imports. About half of the goods from the Middle Kingdom are currently subject to customs duties.

The decision would follow the G20 summit in Argentina, which is scheduled for November. The meeting of Presidents Trump and Xi will take place there. If the talks did not bring the two sides closer together, a new list of goods subject to trade restrictions would be announced at the beginning of December.

These concerns were reduced in an interview with Donald Trump on Fox News, where the US President said he was ready for an agreement with China. The same cannot be said about the other side of the dispute. Despite such a declaration, the yuan in relation to the dollar fell to its lowest levels in a decade. Although, exceeding the USD/CNY highs was minimal, but it is close to the very important limit of 7 CNY per dollar. This may cause more concern about the condition of the yuan and pressure on other currencies of emerging markets.

Apart from China, reports from Mexico and a fall of more than 3% in the peso are also worth noting. Most likely, a decision will be made to suspend the work on the airport despite the significant advancement of its construction (more in our analysis "They give up the airport and the currency is falling"). In addition, it threatens the stability of future foreign investments in this country, especially in the context of the enormous capital expenditure necessary in the mining sector. JP Morgan believes that this decision will reduce the GDP growth rate next year by as much as 0.5 percentage points to 1.9%. It may also be a sign of more significant economic problems for the next large Latin American country.

Extremely weak eurozone data

After very weak PMI readings from the eurozone and deteriorating retail sales in individual EU countries (e.g. in Spain in September it dropped by 0.9% y/y in seasonally adjusted terms - the worst since August 2013), it was forecast to be below the expectations at 0.4% of Q/Q.

In fact, the data can be described not only as bad but even disastrous, as the growth was only 0.2% Q/Q, i.e. half of what economists’ expectations. This is also the worst reading since Q2 2014 (in y/y terms it was 1.7%, weakest since Q4 2014).

Eurostat does not present data split into individual components or countries. However, today, Italy published the data. In the case of Italy, in Q/Q terms, economic stagnation and growth of only 0.8% y/y were observed. According to a short statement by Istat, in Italy, there was a negative contribution from industry. Given the economic turmoil associated with the new populist coalition, political issues are probably at least partly responsible for Italy's disastrous result.

A certain interesting fact may also be the behaviour of the Lithuanian economy. Compared to Q2, the Lithuanian economy slowed down from 3.8% y/y to 2.2% y/y, with a negative impact on Q3 at the level of 0.4% Q/Q (worst since Q4 2009).

The EUR/USD pair reacted negatively to GDP data and moved to around 1.1350. Now, investors may increasingly speculate about the possibility for the ECB to postpone the increase in interest rates beyond the third quarter of 2019. Reports may also emerge about the risk of extending the quantitative easing program, especially if core inflation remains below 1% y/y. Today's data also increases the chance for the EUR/USD to move towards 1.10 level in the coming weeks.

Zloty under pressure but without panic

The Polish currency is steadily weakening and today, before midday, the euro was quoted above the 4.33 PLN limit. The dollar crossed the 3.81 PLN and only 0.03 PLN away from the highest level for a year and a half. The zloty is negatively affected by data from the eurozone, which was presented in the morning of GDP's data (growth at the level of 0.2% Q/Q, i.e. by half as much as economists' estimates).

Over the next few months, the external risks for the zloty are clearly accumulating. Currently, the market may also look more and more carefully at data from the domestic economy. If the worse readings from industry or retail are prolonged, speculation about interest rate increases may close and the discussion about the scenario of interest rate cuts may even begin. This would be very bad news for the Polish currency, which would increase the risk of the dollar or franc reaching the area of 4.00 PLN later this year.

30 Oct 2018 12:37|Marcin Lipka

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.

See also:

29 Oct 2018 16:29

Zloty depreciates (Afternoon analysis 29.10.2018)

29 Oct 2018 12:39

Political turmoil (Daily analysis 29.10.2018)

26 Oct 2018 16:15

US growth above expectations (Afternoon analysis 26.10.2018)

26 Oct 2018 13:54

Strong dollar (Daily analysis 26.10.2018)

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