Investors with rose-coloured spectacles? (Daily analysis 18.09.2018)

Very moderate reaction in the markets after reports of the imposition of new duties on Chinese goods. However, investors' optimism is completely unjustified. The zloty, like other emerging market currencies, remains stable. The euro exchange rate fluctuates within the 4.30 PLN level.

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.

Relaxed reaction to new duties

The Office of the US Trade Representative (USTR) announced at night (CET time) that imports from China to the USA with an annual value of 200 billion USD will be subject to duties at the 10% level. One could say that this information was more or less expected and was not surprising for investors.

However, another information provided by the USTR is much more serious. First of all, there is a sequence of steps if no compromise is made by China. If the US demands are not met, customs duties will increase from the new year to 25% (200 billion USD of imports announced today). Additionally, if China applies retaliatory measures, the remaining part of imports from the country (another 267 billion USD) will be subject to additional customs duties immediately. In total, all imports from China would be subject to additional trade restrictions in the range of 10-25%.

The market reaction is very interesting. While observing the dispute over the last few months, current events seem to be the most negative for the Chinese economy and the global economic situation. Around midday, there was no pessimism either on the stock market or on the currencies of emerging countries. Only the Turkish lira lost about 1%. Other currencies, including the Chinese yuan, were extremely stable. The dollar did not appreciate either, although in the previous phases of the conflict the dollar was stronger. Is the market beginning to perceive the customs conflict as negative for the dollar and the US economy and relatively neutral for the rest of the world?

It seems that this approach, although logical within a decade, has weak arguments at the moment. China is still the economy that catches up with the developed countries and depends on the US economic condition. The United States generates the majority of investments in the world and the economic situation in emerging economies depends to a large extent on the flow of capital from this country. Therefore, during the customs war, although it is a direct participant, the USA may lose relatively little, and other countries (especially China) may lose relatively much.

The market reaction seems illogical, or perhaps investors are positioning themselves for some unexpected solution. For example, if the Republicans lost both chambers of the Congress in the November elections, then it can be expected that the policy of the White House would have to change somewhat and take into account the strong opposition of the Democrats in the context of the trade war. A part of the market can also hope that tariffs will not cause a strong economic downturn in China (fiscal stimulation by Beijing is always possible). However, this wishful thinking can be verified very quickly, especially if the sequence of events accelerates and China does not show a white flag. As announced by the USTR, in the event of retaliation by Beijing, all imports from China may be subject to customs duties. No matter how you look at it, this is not positive news for the global economic situation.

Zloty's stable situation does not surprise

Minor changes on the global market are also a stabilising signal for the zloty. The EUR/PLN quotations are within the 4.30 range. It is not entirely clear why investors are calm (details in the previous paragraphs), but with such a situation on the broader market, the zloty also has no reason to make any significant movements.

Slightly weaker data from the labour market (slower than expected wage or employment growth) may be pointed out, but these GUS readings usually do not trigger a stronger market reaction. The zloty's condition in the following hours will depend on the global market. The fact that foreign countries ignore the negative effects of customs issues should continue to be a stabilising factor for the zloty. On the other hand, if the sentiment deteriorated rapidly, it is likely that the dollar and the franc would still benefit from these changes.