Fears of a customs war support the dollar (Afternoon analysis 4.05.2020)

Orders in the US industry fell at the fastest pace in at least six decades, but the market tends to see hopes in opening up economies. Once again, there is a return of fears about the US trade war with China, which strengthens the dollar and slightly depreciates the zloty.

Another set of dreadful data from the US

The week started without signs of positive sentiment on the market. On the one hand, the gradual easing of restrictions on some parts of the economies promises an increase in activity. Still, on the other hand, the incoming data increasingly illustrate how low this growth will be and how long it will last. In the afternoon, the Census Bureau published data on new orders in the industrial sector. It was expected to fall by 9.5 percent on a monthly basis, but it turned out that the decline was even deeper.

The decrease in machinery orders by 10.3% m/m was the biggest drop in the history of the survey (at least since 1956). In the context of the pandemic and its impact, the market is clearly focused on the upcoming recovery. However, the subject of the depth of the recession will most likely return in the following months, when further data will be available and help to estimate when the economies will return to pre-pandemic levels and their actual closure.

The market faces yet another challenge: a potential trade war between the US and China. The rhetoric of the White House administration and President Trump himself has clearly been building up against China in recent days. Most likely, this is part of the presidential campaign, as well as a distraction from internal problems or failures.

The crisis caused by the pandemic made the market forget about the fact that the US and China negotiated a fragile first phase agreement just over a year ago, and that this more difficult second phase would probably not happen before the end of the presidential campaign. The volatility observed on the market due to the twists in the US and China's negotiations was significant, so more information coming in on this matter could affect the entire market.

Concerns about international trade strengthened the US currency today. The EUR/USD exchange rate fell back to 1.09 boundary in the afternoon (on Friday, it was still over 1.10), which also put pressure on the emerging countries' currencies.

The zloty basket was somewhat weaker today, although the changes were within the fluctuation ranges of recent weeks. Today, the USD/PLN exchange rate rose to approx. 4.19 and the EUR/PLN exchange rate to approx. 4.57. Although today there is little expectation of increased fluctuations or a slightly more fundamental change in the exchange rate, as the main event of the week comes on Friday (US labour market report), the volatility may increase slightly.

Tomorrow's preview

At 3:45 p.m. IHS Markit will publish the final April's PMI data for the USA. The median of expectations is consistent with the preliminary reading and is 27 points. However, market participants may be slightly more interested in the PMI data of the services sector provided by the ISM institute, which will be announced a quarter of an hour later. The market consensus indicates a decrease from 52.5 points in March to 37.8 points in April. On Friday, the same index for the industry fell to 41.5 points, the lowest level since the last financial crisis a decade ago. This publication may slightly increase market volatility, especially as regards to the dollar, and indicate how economically disastrous April was before Friday's Labour Market Report was published.