Sentiment remains weak (Daily analysis 23.03.2018)

The issue of tariffs between the US and China has resulted in significant decreases in most of the world's markets. The situation on the currency market remained calm compared to events on the share market. Strong depreciation of the Turkish lira. The zloty is incurring some losses but to a limited extent. The EUR/PLN pair close to the 4.23 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.

Significant sentiment deterioration

Yesterday, the shares in the US market dropped to about 2.5%. In turn, during the Asian session, the Japanese Nikkei fell by as much as 4.5%. The strong decreases were mainly caused by the US administration's message of customs duties on Chinese goods and the subsequent response from Beijing. However, it seems that investors may have slightly overestimated the scale of the negative consequences.

For some time, in the public space, there was an amount of 50 billion USD of additional tariffs. This meant, that almost all goods imported to the US were to be subject to an additional duty of 10% (500 billion USD worth of annual imports from China). Therefore, this would be a very rapid move. However, it turned out that goods worth 50 billion USD would be subject to additional tariffs at the 25% level (the customs duties' value worth 10 billion USD is much, but still it is not 50 billion USD).

Still, it seems unlikely that all the declared restrictions will enter into force (so far the list of products is not known). Moreover, it is likely that to some extent it is part of the White House game. In the case of steel and aluminium, many countries have been released from the restrictions.

A broad trade war, with such a globalised economy, would not be good for either side. In addition, there are elections in the USA in November (1/3 of the Senate and the whole House of Representatives will fight for votes). Any economic turbulence during this period (including market turbulence) is unlikely to be welcomed. Especially if they were the result of the actions of the current administration.

The currency market seems to have approached the issue appropriately. There have been relatively moderate movements (the strengthening of the yen and the franc, or the weakening of emerging countries' currencies). It was also very difficult for investors to assess which country would be the least affected if the conflict had actually escalated. As a result, there were not many movements in currencies.

In the case of FX, however, the exception was the Turkish lira. Its exchange rate has been very weak recently, and additionally, at night, it was weakened by about 4% (now it is about 1.5%). This has led to historic highs for both the EUR/TRY and the USD/TRY pairs. During the year, the lira lost as much as 20% to the euro, which practically means a currency crisis.

Zloty remains stable

Global share market depreciation and a general increase in risk aversion can be seen in the zloty, but changes in the domestic currency are very limited. The EUR/PLN quotations are close to the 4.23 limit, while PLN/HUF increased to 74, which means that the zloty has pared some of the recent losses to the forint.

Poland is only marginally exposed to the hypothetical negative effects of the trade conflict between the US and China compared to other countries. Therefore, the threats to the zloty through the trade channel remain limited. Only prolongation of the share depreciation and a wider capital outflow to safe haven could seriously damage the Polish currency. Currently, the risk of such a negative scenario is relatively low.