Sentiment calmed down (Daily analysis 06.09.2018)

Bloomberg's reports on Brexit led to a significant currency market fluctuations and losses on the dollar. The sentiment calmed down in emerging market currencies. Investors are waiting for information on foreign trade. The euro exchange rate tested the 4.34 PLN in the first part of the day, but around noon the zloty pared some losses.

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.

Signal from Great Britain?

Yesterday afternoon was published quite surprising information. According to Bloomberg, the United Kingdom and Germany agreed on Brexit. It will be far less detailed than the White Paper published by Theresa May and will be more likely to be accepted by both the EU and the UK.

This is not good news at first glance. It means that the EU's relations with the UK will be more relaxed, so more regulatory or customs restrictions may apply. However, according to Bloomberg's message, the market has interpreted it differently. It is crucial that the agreement is concluded and the details (but probably relatively close cooperation) will be negotiated during the transitional period (between the theoretical and practical exit from the Community - March 2019-December 2020). So far, there has been no formal confirmation of the news agency's reports, although these messages have changed the situation on the broad market.

The pound appreciation against the dollar weakened the US currency on the global market and pushed the EUR/USD above the 1.1600 limit. A weaker dollar also creates a moment for emerging markets to rest. Most of the EM currencies stabilised or strengthened in recent hours, although the Indian rupee deepened its historical lows records to the dollar and the EUR/PLN exchange rate reached 4.34.

Trade in limelight

However, the positive circumstances for EM currencies can be quickly wiped out. Today, consultations with interested parties (mainly companies involved in the foreign trade) are due to end in the context of the imposition of additional US duties on China.

It is difficult to say whether imports worth 200 billion USD a year will be subject to 25% customs duties or whether the whole operation will be divided into tranches. If everything is not clear, much will depend on comments from key members of the Donald Trump administration or from the President himself. The more aggressive the action (the whole customs duties will be implemented immediately), the greater the risk that this will have a negative impact on emerging market currencies. On the contrary, the positive development of the situation would be the stoppage of activities and, for example, the announcement of a return to the negotiations. However, in view of recent media reports, this seems unlikely at present.

Apart from the expected increase in tariff restrictions on Chinese imports (from 50 billion USD to 250 billion USD), the question of Beijing's response and the decision on the second half of imports (in total, the USA imports goods worth 500 billion USD from the Middle Kingdom) remains open. Currently, it seems that the response from China will probably be quite aggressive (e.g. mentioning the possibility of other actions defending Beijing's interests), which may also increase the risk of the US imposing significant customs restrictions on all imports from China. Therefore, the dollar should continue to be supported by the present situation despite yesterday's reports on Brexit.

Zloty does not pare losses

Today, the zloty incurs some losses. Despite the sentiment stabilisation in emerging markets, the EUR/PLN pair rose to the 4.34 level in the morning. In the afternoon, the Polish currency pared losses from the morning, but its condition in relation to the forint is deteriorating for the second day in a row. It is possible that this is the result of yesterday's meeting with the Monetary Policy Council, which did not suggest that the tightening of monetary policy should be intensified.

The press conference after the Council meeting also showed that central bankers were not concerned about events in emerging markets and the risk of expanding trade disputes. On the other hand, the members of the Monetary Policy Council would be more concerned about the hypothetical downturn in Germany. However, the coming hours on the zloty will depend on the reports in the context of customs duties (details in the previous paragraphs), which may harm the zloty rather than help it.