USA and China are prolonging the negotiations? (Afternoon analysis 10.12.2019)

According to The Wall Street Journal, negotiators from China and the USA found a way to avoid additional duties on December 15th, even though the powers had not yet concluded the first phase of the trade agreement. The dollar's quotations move within a narrow fluctuation range, while the zloty is also slightly volatile. However, this is probably the last quiet afternoon of the week.

There will not be additional duties unless Donald Trump surprises us all

Two trading days this week have passed rather quietly. However, market participants may be preparing for increased volatility caused by statements from central banks in the US and the eurozone and elections to the British parliament. Among these events, we should not forget about the upcoming deadline for the imposition of additional tariffs by the USA on imports of goods from China.

In the afternoon, The Wall Street Journal reported that the negotiators on both sides plan to avoid the deadline set on Sunday for the introduction of additional customs duties on Chinese goods worth about 165 billion USD if the first phase of a trade agreement has not been reached by that date. According to the newspaper, the parties will give themselves more time to work out the terms of the agreement, and negotiators from the USA are determined to ensure that China undertakes to purchase agricultural products to the greatest extent possible. It is not in the interest of either side to impose further duties. Still, the WSJ recalls that President Donald Trump has surprised more than once by imposing duties independently of the negotiators' findings.

The market did not react much to these reports because, in recent weeks, the base scenario assumed that on Sunday (December 15th) new duties would not be introduced. Such a version of events was a source of optimism that contributed, among other things, to the achievement of historical records on the equity market in the USA and the strong growth of major European stock exchanges. Probably only an official statement about postponing customs duties and extending the negotiation period may increase the positive sentiment, which seems the most expected at the moment. If the first phase of the agreement is signed this week, which would include more than a withdrawal from the introduction of further duties, it will be a surprise and may strengthen the dollar.

The dollar index (DXY), which measures its strength against six major currencies, was about 0.1% below the level recorded at the end of last week. The EUR/USD pair rose to around 1.1080 at the beginning of the trading session in the USA, and today the rate is characterised by a narrow volatility range (around 1.1063-1.1085). This range will most probably expand tomorrow when the inflation data in the USA and the FOMC statement on monetary policy will be published.

Rather low volatility of the main currencies also contributed to limited fluctuations observed on the zloty. This will not be maintained till the end of the week, given the important events of the following days. Today, however, the EUR/PLN exchange rate moved around 4.29, slightly above yesterday's closing level. The CHF/PLN quotations were also increasing and, for the first time in December, the price reached 3.93 today, which was, however, a result of today's weaker sentiment on the broader market and a slight "risk-off". This afternoon seems to be a calm and stabilising one, but it will probably be the last afternoon this week with relatively low market volatility.

Tomorrow's preview

At 2:30 p.m., the Bureau of Economic Analysis (BEA) will publish data on consumer inflation (CPI) in the USA in November. This is not the type of inflation that the Federal Reserve takes into account in its projections (it is PCE inflation), but it can indicate price trends in the US economy to market participants. The median of market expectations indicates that the core inflation rate (excluding the impact of energy and food prices) remained at 2.3%. Friday's data from the USA suggested that the economy is in a "goldilock" condition, i.e. a strong labour market with wages rising above expectations and a significant improvement in consumer mood, while there is no inflationary pressure. A single reading of the CPI will not change our views here, but a reading of 2.4% or above (low odds) may spark discussions about the return of price pressure, as well as slightly strengthen the dollar.

The main event of the day will be an evening statement from the FOMC and a press conference with Jerome Powell, FOMC Chairman and Head of the Federal Reserve. Interest rates will most likely not be changed, but what may be interesting is the tone of the message and Powell's statements in the context of strong labour market data and consumer sentiment. It will probably take a month or two of data that clearly exceed expectations to return to the question of rising interest rates. FOMC may also mention weaker ISM data on activity in the industrial and services sectors. Undoubtedly, the uncertainties associated with the customs war, which is having a negative impact on the global economy, contributing to three consecutive US interest rate cuts, will be highlighted. Overall, however, Friday's data were so optimistic that the message from the Powell announcement and conference may be slightly hawkish, which will ultimately strengthen the dollar.