Will custom duties determine sentiment? (Afternoon analysis 6.09.2018)

Clam sentiment visible during Thursday's session may be disturbed by the potential announcement of new tariffs on Chinese imports. Good data from the USA support the dollar. The zloty shows signs of weakness.

EUR/USD above 1.16. Will it last?

During today's session, both emerging countries' (EM) currency quotations stabilised and significant drops in the main market indexes were stopped. The dollar lost part of the profits - the main currency pair quotations, i.e. EUR/USD, have increased today to the 1.166, the highest level since last Friday. Perhaps this is also the result of the pound's appreciation against the dollar, after yesterday's announcement that Germany agreed with the UK on a less detailed Brexit, which reduces the risk of leaving the EU without an agreement.

The White House's trade information is possibly the most relevant today. There is a good chance of introducing 25% tariffs on imports from China worth 200 billion USD (more than what has already been announced earlier - 50 billion). Although such a risk exists, it is unlikely that a duty of the entire amount would be introduced immediately. The division into tranches seems much more likely, which on the one hand may put pressure on China (it has much more to lose than the USA), and on the other hand, it does not exclude negotiations at the same time.

Whether this is positive or negative news for the market, depending on Donald Trump's comments or other high-ranking officials of his administration. Strict rhetoric would most likely worsen sentiment on the market, affect share prices, weaken EM currencies and exert pressure on the zloty. In turn, more accommodative rhetoric could slightly improve the sentiment. The scenario of complete abandonment of additional duties seems the least likely, although it would potentially be the most positive for the market.

In any scenario, with the exception of short-term fluctuations, the dollar will probably win. The US has the least to lose in the trade war. The US economy is growing at a very fast pace, and interest rates are systematically rising (as opposed to, for example, the eurozone). This was confirmed by positive macroeconomic data from this economy in the afternoon.

The number of initial jobless claims fell last week by 10k to 203k, the new lowest result since December 6th, 1969. After a much better than expected ISM index for the industrial sector (only 0.1 was missing to reach 34-year highs), the similar index for the services sector published today also surprised positively, exceeding the market consensus by 1.5 points and rising to 58.5 points, which increases the probability of the dollar returning to growth path. This increases the likelihood of the dollar returning to the upward trend.

This would not be such a good news for the zloty. For another day in a row, the Polish currency lost in relation to the Hungarian forint - the PLN/HUF pair fell below 75.5, to its lowest level in two weeks. In the morning, the EUR/PLN pair set new, three-weekly highs, growing above 4.34. This shows the relative weakness of the zloty and in the event of a worsening sentiment on the market and a strengthening of the dollar, these levels may be exceeded, also in the franc, where CHF/PLN constantly fluctuates around annual highs of about 3.862 (today is less than 3.85).

Tomorrow's preview

The most important publication of the last trading day will be the labour market report for August, which will be published by the US Department of Labour at 2:30 p.m. Today's estimates of ADP's on change in employment showed an increase of 163k, which is 27k below market expectations for the official data that we will know on Friday. However, the reading between 150k and 250k should not affect the market, and its attention may focus primarily on wage data, which has a significant impact on inflation.

The market consensus assumes an increase in average hourly wages by 2.7% per year and 0.3% per month. A deviation of as little as 0.1 percentage points from the reading may result in a significant increase in the dollar fluctuations. A reading above 2.7% year-on-year would reinforce the argument of a rapid monetary tightening aimed at counteracting overheating of the US economy, thus strengthening the dollar and potentially weakening the zloty basket. This argument may have weakened somewhat after President Trump's comments indicating that he would have preferred lower interest rates, as well as after a profoundly interpreted speech by the head of the Federal Reserve, Jerome Powell, during the symposium in Jackson Hole.