Interview that introduced uncertainty around trade (Daily analysis 8.11.2019)

After the market has discounted a large part of the positive information related to the US-China trade agreement, some concerns arise among investors. The zloty remains stable on the broader market, although further slight strengthening of the dollar pushes the USD/PLN pair above the 3.85 PLN boundary.

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.

Wave of optimism and doubt issue

Over the last few days, we have been reporting on the terms of the expected trade agreement between the US and China. We noted the dominance of positive reports that indicated that the first phase of the agreement was to be more comprehensive than initially expected. There were many comments from Chinese officials that were received without any attempt by the US to rectify, which might suggest that Beijing does not go above and beyond the joint arrangements. Other hot spots in the relationship between the powers (Hong Kong, the fentanyl scandal) were also heading into a positive solution.

Investors believed in the opportunity for a breakthrough in Beijing's relationship with Washington. The US indexes set new historic highs, and the yuan clearly strengthened against the dollar by more than 2% from the weakest levels, causing the USD/CNY exchange rate to fall below the 7.00 limit. Today, the Financial Times also wrote, citing EPFR Global data, that in one week 7.5 billion USD of capital flowed into investment funds and the ETF market, i.e. the highest since January 2018.

However, there are some doubts as to the quick and comprehensive agreement that the market has practically already valued. Yesterday's interview on Bloomberg TV with Larry Kudlow was relatively optimistic. An economic advisor to the White House said that if "the first phase of the agreement is agreed, then there will be agreements on customs duties and concessions". However, shortly after the interview with Kudlow, Peter Navarro, the Director of Trade and Manufacturing Policy, appeared at the competitive and conservative Fox Business station. His comments had a completely different tone.

Navarro stated that, among the conditions of the first phase of the agreement, there are currently no arrangements to remove any of the existing tariffs in force.

Navarro explained that he was not in favour of disclosing the stage of negotiations before they were concluded. He called the reports from Beijing "the spectacle of the Chinese propaganda press". "They simply negotiate in public space, trying to push us in a specific direction..., but the only person who can make that decision is President Donald J. Trump," said Navarro in an interview for Fox Business.

Of course, it is worth having a certain corrective approach in response to Navarro's comments, who in trade policy is more hawkish than dovish. It should also be remembered that the US media are already in a campaign atmosphere, but the confrontational opinion of Navarro may introduce an element of uncertainty. There are also opinions that Beijing is starting to feel more and more confident in these negotiations, estimating that the USA may have a lot to lose (higher prices before Christmas, negative impact on Donald Trump's election campaign) if the agreement is not successful. This excessive self-confidence, if it is not only a part of the media coverage, may hinder the agreement. In general, the market may be increasingly sensitive to negative trade reports. If it turns out that the agreement will not be comprehensive, one can expect a strong disappointment in the broader market and a marked increase in risk aversion.

Zloty with no significant changes

Little happens in the case of the Polish currency. Investors were not afraid of the European Commission's lower than expected GDP forecast for Poland. This is probably due to the fact that they still show solid economic growth in comparison to other countries, and additionally, the development is connected with the external balance and moderate structural deficit of the public finance sector. When looking for threats to the PLN, one can draw attention to the issue related to the USA-China relations (details in the previous paragraphs). Positive information on the negotiations between the powers helped the Polish currency. If now it turned out that the final agreement would not be as comprehensive as the market expects, then the zloty could noticeably weaken, and the dollar could even cross the 3.90 PLN boundary.