German industry does not disappoint (Daily analysis 7.08.2020)

On the last day of the week, while waiting for the report on the US labour market in July, "in the meantime" we had a reminder of the geopolitical tension and deteriorating relations between the US and China.

The US vs China - the conflict continues

The US President, Donald Trump, issued last night an executive order prohibiting US companies from doing business with the popular Chinese applications TikTok and WeChat (Microsoft is seeking to take over in some parts of the former). This does not improve the background for trade negotiations between the powers in the coming weeks. It is also more likely that it will be difficult to de-escalate the geopolitical tension before the November US presidential elections.

The issue called Geopolitics can get a little bit more action after the holidays, potentially strengthening the dollar somewhat. However, more macroeconomic data are now coming in, which confirm the positive trends in Europe and the quite good effects of fighting the pandemic. Yesterday's published data on industrial production in the Czech Republic, Hungary and Italy, among others, showed stronger than expected increases. Today, the largest European economy, i.e. Germany, can also be added to the list.

Orders are increasing and production is not failing

According to Destatis, German industrial production (seasonally adjusted) increased by 8.9% on a monthly basis in June, 0.7% above expectations. Yesterday a positive indication of trends in the sector was received in the form of data on machine orders. They increased by 27.9% during the month (also in June), clearly above the expected 10.1%.

These positive processes in Europe, compared to the US, are part of the story behind the good condition of the euro and the weaker dollar. The US currency has also lost the advantage of higher interest rates in the US, which reduces investor demand for it. The EUR/USD exchange rate is still above 1.18, although before midday it is about 0.4% below yesterday's closing.

The main currency pair close to 1.20

For the main currency pair, i.e. the EUR/USD, a level of 1.19 now appears to be the limit which, if exceeded, could open the way for a further weakening of the dollar and an excess of 1.20, which was last observed in the first days of May 2018. Such a stimulus may be provided by a report on the US labour market, that will be published today, one hour before the session on the New York Stock Exchange.

For the zloty, the continuing weakness of the dollar and further macroeconomic data from the region that are better than expected provide a positive stimulus. The zloty's exchange rates against the main currencies have moved in recent days within a very limited range, which is also due to the weakening of the dollar, stopped in recent days. Today, the USD/PLN quotations move in the range of approx. 3.72-3.74 which is still close to the bottom line for almost two years (approx. 3.69). Increased fluctuations can be expected around the publication of the labour market report in the afternoon.

In turn, the EUR/PLN exchange rate continues to move around 4.40 (today around 4.41-4.42) and is supported by a globally strong euro. However, further improvement in Europe and continued falls in the dollar may gradually lead to a fall in the EUR/PLN exchange rate, which may last until the autumn when geopolitical tensions are likely to increase accompanied by the negative effects of another wave of the pandemic.