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Slight rebound (Daily analysis 03.07.2018)

3 Jul 2018 12:44|Marcin Lipka

The Chinese central bank's assurance that it wants to keep the yuan's exchange rate stable and the agreement within the German coalition support sentiment. The market awaits for further information on foreign trade. Weak data on retail sales in the eurozone. The zloty appreciates against the euro or the dollar but loses to the forint.

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.

Sentiment's fluctuations confirm nervousness

The German coalition managed to resolve an internal migration dispute. This supports the European currency slightly. The risk of early elections in Germany has been significantly reduced, which also translates into more stability in the single currency area.

However, it should be noted that it is not migration issues that are the main cause of market disturbances and weakening of e.g. the zloty. First of all, the market is afraid of expanding trade disputes, retaliatory measures by individual countries and a general deterioration of the investment climate and willingness of households to consume. One of the signs of a worsening outlook for the global economy was the recent weakening of the Chinese currency. This morning, dollar cost 6.7 yuan. It is almost 5% more than in mid-June. Finally, such a strong movement motivated the People's Bank of China (PBOC) to intervene verbally.

PBOC Chairman Yi Gang said that China is going to "keep its exchange rate stable and at a reasonable level". When the Chinese authorities comment on the Yuan exchange rate, they tend to refer to its exchange in relation to 24 currencies (the zloty is also in the basket), therefore stabilisation does not have to concern a single pair. However, overall, the statement has brought the USD/CNY pair down to 6.65, so about 1%.

On the one hand, the PBOC's actions can be seen as positive, i.e. as a desire to stabilize the situation, but on the other hand, it may also be a signal that no breakthrough in foreign trade is expected before July 6th.

US tariffs of 25% on imported goods from China worth 34 billion USD will be introduced as planned. This increases the risk of retaliation and is bringing the real trade war closer.

Weak data from the eurozone. Zloty almost with no reaction

Except for global issues, data on the current economic situation in the eurozone is also worth noting today. Unfortunately, it surprised negatively once again. Retail sales in annual terms (working days adjusted) increased by only 1.4 percentage points year-on-year (vs. 1.6% year-on-year increase in the previous year). Taking into account the 6-month average of retail sales (1.7% y/y), it is the lowest in a year and a half and one percentage point below the values observed in the autumn of last year when there was the economic boom. It is bad for the GDP data for the Q2 of the eurozone.

In the case of the zloty, a new local high of 4.4150 per the euro was reached yesterday. Despite a clear improvement in global sentiment (political issues in the eurozone, PBOC actions), the domestic currency reacted moderately and the rate dropped to about 4.40. In addition, the zloty weakened against the forint, which may suggest that investors also value the next stage of the Warsaw-Brussels conflict.

The Polish Supreme Court has been highlighted on the Financial Times website, among other things. A broad discussion of the subject in foreign financial media may well be one of the reasons for the relatively weak zloty's behaviour. In the following days, it will be crucial for the zloty to know which direction the trade dispute is heading. If the first serious wave of customs duties on Chinese goods (July 6th) is physically implemented, tensions in the global market may persist, and this will be a negative signal for the Polish currency.

3 Jul 2018 12:44|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.

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