Strong dollar, weak EU (Daily analysis 03.08.2018)

The US currency is gaining value. Weaker than expected retail sales in the eurozone, the Italian debt sell-off and multi-year low PMI from the Spanish services were negative messages for the common currency. The zloty remains stable despite further pressure on the Chinese RMB.

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.: The US Labour Department for July (survey: Employment change in the non-farm sector – 193k; unemployment rate – 3,9%; Average wage changes – 0,3% m/m and 2,7% y/y).
• 4:00 p.m.: The July ISM reading from non-manufacturing sector (58,6 points).

Further dollar appreciation

The US currency is continuing its appreciation move. The EUR/USD during early trading in Europe dropped to 1,1560 level. A stronger dollar is both a result of broadening trade dispute and more worrying readings from the eurozone.

Risks are rising that 25 percent tariffs on the Chinese goods valued 200 billion dollars will be introduced. Wilbur Ross, the US trade secretary, said on Fox Business that “We have to create a situation where it’s more painful for them to continue their bad practices than to reform it”. It is a direct comment to China which, according to the US, violates intellectual property rights and forces technology transfers.

Ross also doesn’t like that China uses retaliatory measures instead of changing its behavior. “So the president now feels that it’s potentially time to put more pressure on in order to modify their behavior” stressed one of the leading members in Donald Trump administration.

Consequences of further tensions between Beijing and Washington is further pressure on the RMB. The USD/CNY briefly touched 6,9 level which was the lowest level RMB-USD valuation for more than a year.

Issues in the eurozone

Fears are rising concerning some of the common currency economies. Today the 10-year Italian yields exceeded 3.00 percent level. It is a result of conflict between the finance minister and leaders of the parties which won this year election. Talks are ongoing how to address budget issues regarding tax cuts and guaranteed income. The budget project is set to be announced in September but it is possible that some scope of this will be known as early as today.

Not many positive things can be said about the eurozone PMI readings. Besides Germany, the publications were fairly weak and suggest that the GDP reading will rise 0,3% this quarters matching already fragile Q2 data. Additionally, services PMI from Spain dropped to the lowest level since November 2013. However looking at both major peripheral economies (Spain and Italy) still the former looks better than the later.

The resilient zloty

Another day and another good performance of the Polish currency. Usually sensitive to the external issues zloty (strong dollar, trade tensions) has been resilient. It is still worth noting that the PLN benefits from fewer fears concerning trade disputes between the US and the EU. Local economy performance seems also to be helping as the first move on rates will rather be a hike than a decrease.

In the afternoon the US Labour Department data is set to hit the wire. The most important reading is wages (market consensus – 2.7% y/y and 0.3% m/m). Higher than expected pay rises may somewhat boost the dollar but concerning the zloty’s solid performance risks that the EUR/PLN will exceed 4,30 level and the USD/PLN markedly increase above 3.70 mark remain limited.