USA and China heat the atmosphere (Afternoon analysis 8.10.2019)

Negotiations have not even started, and China and the US are already trading blows which reduce the chances for a breakthrough deal. Producer inflation in the USA is the lowest in 25 months but the dollar remains stable. The pound is under pressure after a phone conversation between Prime Minister Boris Johnson and Chancellor Angela Merkel.

EUR/USD still close to 1.10

After a positive session in Asia, one could expect a similar appetite for risky assets, also in Europe. From the early morning hours, disturbing information began to flow from the USA and China. China suspended the NBA games in the country (with an audience about four times bigger than in the USA). This was a reaction to the support for democratic protests in Hong Kong by the NBA authorities on Twitter.

The USA has also blacklisted 28 Chinese companies that will no longer be able to buy goods from the USA. Among them, 8 are engaged in artificial intelligence (China aspires to dominate this market) and 20 companies with government ties. There was no need to wait long for China to react, which threatened to take revenge for these actions against Chinese companies. The White House administration has also announced that it will reduce its exposure to Chinese shares in government pension funds. The aforementioned events add more uncertainty to the outcome of the trade negotiations.

There was also information that during the morning phone call of the British Prime Minister Boris Johnson told the German Chancellor Angela Merkel that Brexit agreement was practically impossible. As a result, it is no surprise that today we are witnessing an increased demand for less risky activities. The value of traditional safe havens - the yen, gold and the franc - is increasing. On the other hand, European stock indexes and raw materials susceptible to trade disturbances such as oil are clearly under pressure. However, the dollar's quotations are stable. The EUR/USD exchange rate moves just below the 1.10 boundary, just like yesterday.

The data on producer inflation (PPI) in the USA in September may help to exceed this boundary. According to the Bureau of Labor Statistics (BLS), the most significant core inflation index (excluding energy and food prices) was 2.0% per year, 0.3 percentage points below the market consensus. This is the lowest inflation rate in 25 months. On a monthly basis, it did not look better: a growth of 0.2% was expected, while the data showed a decrease of 0.3%. These are rather secondary data in terms of their impact on the dollar, but they may slightly increase the supply pressure on the dollar. At least until Jerome Powell's speech in Denver, the president of the Federal Reserve, is scheduled to take place at 8:30 p.m. (CET).

No significant changes in the dollar's value result in the USD/PLN quotations moving in a limited fluctuation range and at around 3 p.m. they were slightly above 3.94. The worsening of the global sentiment may exert a slight pressure on the zloty - especially in the case of the CHF/PLN pair, given the inflow of capital to safe havens, although the changes should not be large. The pound against the zloty fell below the 4.81 boundary today and reached its lowest level in a month. It is still expected that the British currency will fluctuate significantly in connection with the upcoming Brexit term. It is likely to be prolonged, but the new elections and the risk of an even greater confrontation between the (new) UK government and the EU, given the previous behaviour of the British Prime Minister, increase the likelihood that the pound will depreciate.

Tomorrow's preview

Tomorrow's calendar of macroeconomic publications lacks publications that could have a significant impact on currency quotations. At 4:30 p.m., Jerome Powell, president of the Federal Reserve, will speak in Kansas City, and three hours later, the minutes of the last FOMC meeting will be published. Theoretically, these events could slightly increase market volatility, but they would be potentially limited movements.

This week's trade negotiations take place (scheduled from Thursday), and the market's eyes are turned on them. Before this happens, both sides are already intensifying their rhetoric, which heats the atmosphere around these talks. Almost all asset classes are now responding to headlines of information coming from both sides. The uncertainty connected with the upcoming Brexit date (end of October) and the incoming information, which also cause significant market fluctuations, need to be added to this. In the context of this week, fundamental factors will play a rather marginal role.