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Italy, Spain and tariffs (Daily analysis 01.06.2018)

1 Jun 2018 12:52|Marcin Lipka

European politics and the US-Europe trade dispute have been dominated by economic reports. Data from the US labour market is important, but not crucial with current situation necessarily crucial. External pressure on the zloty has maintained. The EUR/PLN pair remains in the range of 4.31-4.32, and the dollar is close to the 3.70 boundary.

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

  • 2.30 p.m.: Data from the US labour market. Changes in employment in the non-farm sector in May (estimates: +190k). Unemployment rate (estimates: 3.9%). Change in weekly wages (2.6% year-on-year and 0.2 month-on-month),
  • 4.00 p.m.: ISM index from the US industry (estimates: 58.2 pts for May).

Trade and politics

The closing week was extremely intense in terms of the impact of political events on the currencies. Friday, however, brings some calm, although at least in the case of Italy, it seems that all the problems are not over.

It turned out that there would be no new elections in Italy and the government would be formed by the winning party - the Movement of Five Stars and the League. The dispute, which did not allow for the early creation of this cabinet (i.e. the Eurosceptic Minister of Economy), was resolved partially. Mr Paolo Savona will become a Minister for European Affairs.

The Ministry of Economy will be taken by Giovanni Tria. Is this a pro-European candidate? It seems that it is not quite clear. Bloomberg quotes his statement a year ago when he said that "people who support an unconditional exit from the eurozone as a cure for all evil are wrong and the ECB's head, Mario Draghi, is also wrong to say that the euro is irreversible".

The Italian media have started to conduct surveys on the willingness to stay in the eurozone. According to the Il Sole 24 newspaper, 55% believe that they should remain in the single currency area and 29% disagree. The rest have no opinion. However, the distribution of votes among the League's supporters is different (currently about 25% of the support and a co-coalition member in the populist government), with 52% in favour of leaving the eurozone. Therefore, this issue may still attract attention in the coming months, especially when the costly economic plans (about 100 billion yearly) are held back by the deficit limits imposed from Brussels. Moreover, the rating agencies will start to take a serious look at Italy's finances and Italy's creditworthiness is only two levels above the rubbish level (in Moody's case, the perspective is negative). This could be the main risk factor in the future before the new government starts for good.

Spain and trade

There is a lot of political activity in Spain. It is worth noting, that today's vote of no confidence in Mariano Rajoy's cabinet is not a systemic problem for Spanish participation in the eurozone. The authorities will probably take over the mainstream socialists for a few months, and in the next elections, the centre's Ciudadanos will receive a lot of support, according to the polls.

It also seems that the trade conflict initiated by the US (customs duties on steel and aluminium) has so far been a negotiation game run by the White House in order to reduce the US deficit in the balance of trade in goods. Only if the restrictions are applied (or if there is a serious risk that they will apply) to the automotive industry, for example, it will be possible to speak of a real trade war. At the moment, however, this is going to happen.

What does all this mean for currencies? It seems that the euro can be supported by the perspective of further elections in Italy. However, it can be seen that systemic risks in the eurozone may still persist, which is likely to hold the euro back from appreciating. In turn, the dollar should still be supported by monetary policy (the Fed is unlikely to withdraw from increases by Italy or trade), so the trend towards the EUR/USD pair started one and a half months ago is likely to continue.

Zloty still under pressure. Data from the US

The Polish currency remains rather weak, mainly due to recent events in Italy. The zloty is also not supported by macro data. PMI from domestic industry decreased to 53.3 points, the lowest level in 9 months. However, this data is not disastrous, and in addition, the lower readings are the result of supply problems (the largest production backlog since January 2015) rather than problems with demand. Orders are also growing, therefore the economic situation is likely to remain relatively good for at least the next few months.

As for the next hours, the US data will be in the limelight. Investors will look mainly at the wages, i.e. partly also at the future inflationary pressure. The consensus is at the level of 2.6% year-on-year. It seems, however, that the data would have to differ significantly from the forecasts (by at least 0.2 percentage points) in order to trigger more serious movements. Generally speaking, until the end of the day the situation on the Polish zloty may not differ much from what we observed before noon.

1 Jun 2018 12:52|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.

See also:

30 May 2018 16:24

Zloty pares its losses (Afternoon analysis 30.05.2018)

30 May 2018 12:36

A bit calmer but still intense (Daily analysis 30.05.2018)

29 May 2018 13:47

Panic (Daily analysis 29.05.2018)

28 May 2018 12:06

Italy’s policy (Afternoon analysis 28.05.2018)

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