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Geopolitics and economy (Daily analysis 11.07.2018)

11 Jul 2018 13:39|Marcin Lipka

The risk of further customs duties being imposed by the USA on Chinese goods is increasing. The NATO summit in Europe may also be important for the US trade policy towards the Union or even for the euro exchange rate. The zloty is depreciating, but taking into account the scale of threats, the downward trend is quite limited. The influence of today's MPC meeting on the Polish currency is unlikely to be significant.

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

  • 4:00 p.m: Publication of a statement after the MPC meeting, an outline of new NBP macroeconomic forecasts and beginning of a press conference after the Council meeting.

Another part of custom duties

At night, the United States announced the next part of the customs duties on Chinese goods. This time, customs duties are going to amount to 10%, and they will cover annual imports worth 200 billion USD. The list of goods is extremely long (almost 200 pages with 40-50 items per page). If we add to this the duties which have been already introduced (34 billion USD) and which are planned to be applied in the coming weeks (a further 16 billion USD), we will have 250 billion USD, i.e. exactly half of the US imports from China.

Naturally, Beijing stated that it would respond to the additional duties, although it is not entirely clear how, as Chinese imports from the USA amount to around 130 billion USD. Therefore, a greater number of non-tariff related restrictions may be expected (administrative restrictions at the borders, favouring foreign capital from outside the USA, or even, in extreme cases, a top-down boycott involving the US goods). All these elements are beginning to look more and more like a trade war.

However, it is worth noting that not only negative reports are coming from the US administration. More and more leading members of the Republican Party are beginning to oppose the White House's trade policy. Kevin Brady, chair of the House Ways and Means Committee of the House of Representatives, said that the latest tariff list was an escalation of a trade conflict which could lead to a long-standing trade war between the two world's largest economies. Brady also made an appeal for a meeting between President Trump and President Xi.

Pressure coming from the Republican on the White House in the context of resolving trade issues may increase, given the fact that in November we have elections to Congress (1/3 of senators and all members of the House of Representatives will fight for seats). All in all, despite the action taken by the Republican Party, recent events have increased global risks, which has also translated into falls in the emerging markets' currencies. The Chinese yuan, among others, has noticeably depreciated. The dollar costs almost 6.7 CNY.

Geopolitics with an increased importance on the market

In the case of threats related to foreign trade, it is worth noting other processes as well. Trump's administration is becoming increasingly suggestive that trade relations with the European Union may depend on the greater involvement of Western European countries in security matters and, above all, on an increase in their budgets devoted to defence.

This, of course, creates additional risks. Without an agreement at the NATO summit in Brussels on the increase in defence spending, investors may become concerned about Washington's more confrontational attitude towards trade with Europe. The European automotive industry would be particularly at risk, especially the export of passenger cars produced by German companies to the US. Therefore, the risk of a trade war on many fronts would start to materialise, which could have a negative impact on the European currency and deepen the threats to the currencies of emerging countries.

Weaker zloty but there is no panic present on the market

Today, the zloty is weaker than it was yesterday at the closure, but it is not a particularly strong movement. The euro or the dollar appreciated by 0.01-0.02 PLN, which means that the increase does not exceed half a percent. However, the zloty's condition depends to a large extent on the behaviour of investors across the ocean. It is difficult to determine exactly how this fear will translate into the return of capital to the USA and the willingness to purchase safe assets. However, if the risk of a trade war spreading to the European Union grows, then the recent highs seen on the euro or the dollar could be exceeded.

Taking into account the number of global impulses and their importance, today's MPC meeting will bring rather limited change. The outline of the new macroeconomic forecasts is unlikely to support changes in monetary policy in subsequent quarters, therefore the response to the Council's message should be limited.

11 Jul 2018 13:39|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.

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