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Geopolitical tensions increase (Daily analysis 22.05.2020)

22 May 2020 13:21|Bartosz Grejner

China's plans for Hong Kong escalate the already existing serious tension in relations with the US. Market sentiment is worsening, the dollar is consequently appreciating, but these are still limited changes: about 0.5% in relation to the euro or the zloty.

The dollar may return to the upward path again

For the last two or three weeks, almost every day there have been reports of deepening conflict between the USA and China. The US administration's accusations against China on coronavirus are another element of uncertainty beyond the issue of international trade. It has also become clear that a firm stance towards China will be part of Donald Trump's presidential campaign (elections in November), which may indicate a potential deterioration in market sentiment in the coming months.

Although this is not directly related to the US, China today announced plans to impose a new national security law in Hong Kong. The timing was probably not accidental when the whole world (and Hong Kong too) is struggling with the coronavirus and its impact on the economy. However, this move escalates the conflict with the US (some members of Congress have already criticised this move) and shows that the geopolitical risks to the market have increased significantly and the impact of the pandemic may not be the only problem later in the year.

China's plans for Hong Kong have already clearly worsened sentiment in the broader market. Like last year, when geopolitical tensions were increasing, demand for the dollar has increased today. This was not a drastic change, but the main currency pair, i.e. the EUR/USD, fell by 0.5% around the midday, breaking the 1.09 limit slightly. As a result of the dollar's appreciation on the global market, the USD/PLN exchange rate also increased, while yesterday the USD rate fell even to the level of 4.1070, today it has already returned over 4.15.

Increased geopolitical tensions may increase the volatility of the zloty or the euro. Apart from USD/PLN, changes in the value of the zloty still remain within a limited range. The EUR/PLN exchange rate fluctuates around 4.51-4.53 and CHF/PLN around 4.24-4.27. Looking ahead, the zloty should increase within a year or so, but depending on how the tension between the US and China develops, the zloty may also depreciate in relation to current levels.

Disastrous data on sales

Today, the Polish Central Statistical Office (GUS) published data on retail sales in April in Poland. As expected, they were dreadful and even slightly deeper than the economists' consensus. The 22.6% annual decline was 3.6 percentage points higher than expected, but the impact of these data was marginal on the market. The same decline was also published in April by the British Office for National Statistics in the morning. However, the market is now focused on the effects of lifting restrictions and the data, even if disastrous and illustrating the scale of the recession, have very limited effect on the currency market.

22 May 2020 13:21|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.

See also:

21 May 2020 17:24

More than 25 million unemployed in the USA (Afternoon analysis 21.05.2020)

21 May 2020 14:25

Increased tension between the US and China (Daily analysis 21.05.2020)

20 May 2020 13:56

Dollar remains under pressure (Daily analysis 20.05.2020)

19 May 2020 16:58

Economic confidence in Germany recorded a sharp jump (Afternoon analysis 19.05.2020)

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