Strong dollar, lira slump (Daily analysis 1.08.2018)

The US currency markedly gained value. The dollar is both supported by the Federal Reserve comments and more trade tensions between China and the States. The zloty has weakened somewhat but concerning significant external threats reaction on the PLN seems to be limited.

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

• Godz. 14:30: Weekly jobless claims (survey: 220k).
• Godz. 16:00: Factory orders (survey: 0,7% m/m).

Fears on foreign trade returns

Yesterday the prospects concerning the introduction of new 25-percent tariffs on 200 billion dollars of Chinese goods import were just based on media reports. Today, however, the fears are much broader based. It is both a result of late Wednesday’s comments from the US side (White House spokesperson responses to questions on trade) and today’s official communicate from the Chinese side.

“China is fully prepared and will have to retaliate to defend nation’s dignity and the interests of the people.” These comments were present at the official Ministry of Commerce website according to Bloomberg news agency.

After the most recent information flow, the Chinese currency was pushed lower. The RMB drooped to more than one-year low to the US dollar. Concerns regarding future trade relation between the two most powerful economies pushed lower Asian and European equities. The S&P 500 futures index suggest that indices across the pond will also open lower.

The Fed is not eager to pause

The dollar is not only supported by trade tension and capital outflow from some EM economies. The Fed suggested yesterday that it is on the path to continue interest rate hikes in the following quarters.

The US economy performance was increased from solid to strong. The job market has also been strong and both consumer spending and capital investments “have grown strongly.” The Fed didn’t include a phrase “for now” concerning the monetary tightening. If the phrase were included, it would have meant that the pause in hikes might be expected fairly soon. As a result, the statement supports a scenario of two more rate increases this year. It is a positive dollar message.

Finally, we have two elements which are dollar positive (trade tensions and further smooth rate hikes). The EUR/USD is quoted around 1,16 level in the midday trading. The pair is relatively close to testing levels (around 1,15) which will set the new, more than one-year lows.

The zloty is relatively stable

Worsening global sentiment (strong dollar, selling pressure on equities, trade tensions) pushed the zloty lower. It is worth noting, however, that the PLN depreciation is limited concerning the external environment. The EUR/PLN is still traded below 4,30 mark, and the dollar has not exceeded 3,70 level.

Limited pressure on the PLN can be contributed to the truce between the US and the UE concerning foreign trade. Without last week deal between Trump and Juncker the Swiss franc, the euro and or the dollar would be probably much higher. The EU protection will not protect the zloty from all threats but still should ease the negative impact. As a result, a panic selling on the PLN and retest of the July highs (the EUR/PLN around 4,40) is not a base case scenario even in case of higher tariffs on the Chinese goods.