Zloty records one and a half year lows (Daily analysis 02.07.2018)

The risk of expanding trade conflicts is the main reason for the weak global sentiment. Investors are also not supported by high commodity prices and migration disputes in the EU and Germany. The zloty under strong pressure despite better than expected PMI. The EUR/PLN at the 4.40 boundary.

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

• 4:00 p.m.: ISM from the US service sector (estimates: 58.5 pts).

Market seeks for positive information

There is a clear aversion to risk on the market. Although there are many factors behind the weak global sentiment, investors are mainly afraid of trading risks. The key date (6 July) is coming when duties on Chinese goods imported by the US will come into force. The White House's rhetoric towards the European Union also increases the tension. While the absence of a broad trade war remains as a baseline scenario, the growing risk of it is being assessed by the market.

On Sunday, US President Donald Trump, while discussing a number of topics in a recorded interview in Fox News, said that the European Union in the context of trade with the US is probably as bad as China is. Donald Trump also repeated, among other things, information about the deficit of 150 billion USD.

Also on Sunday, the Financial Times wrote that the Union was preparing for retaliatory customs duties (according to documents seen by France Télécom). If the US applied tariffs to cars imported from the Union, the EU could impose trade restrictions on US imports worth 300 billion USD, practically all goods imported from the US. In addition to the dispute with China and the EU, it should also be remembered that President Trump also expresses his scepticism about the World Trade Organisation (WTO) from time to time. The topic was also on the agenda last weekend.

Therefore, a series of trade-related information is negative and shows that the rhetoric of all parties is becoming stricter. If this does not change, a further deterioration of the global sentiment can be expected. Currently, the market does not value the actual trade war, but only the growing risk of such conflict. So there is still a lot of space to worsen the market conditions if we were close to the realisation of the threats.

In addition to trade, the oil situation is still negative for importing countries. Despite Washington's efforts to put pressure on OPEC to increase its supply significantly, this strategy has failed so far and commodity prices have fluctuated close to recent long-term highs.

In turn, the EU's sentiment is worsened by the lack of a common approach to migration and the dispute within Germany on the same issue. Theoretically, investors should have got used to this for a good few years, but the fragile coalition run by Chancellor Angela Merkel increases political risks in the region. As a result, it is difficult to find positive signals on the market, which keeps the minorous mood and harms the currencies of emerging countries, including the zloty.

Euro tests 4.40

Global problems (foreign trade, raw materials) and the EU situation continue to put pressure on the zloty. The EUR/PLN tests approx. 4.40, which is the highest value since one and a half years. The franc cost 3.80 PLN and the euro 3.77 PLN. The pound is getting closer to 5 PLN boundary.

Today, apart from external factors, the pressure on the zloty was caused by the country as well. There is still a slight inflation in Poland (CPI below the forecast of 1.9% year-on-year vs. 2.0% year-on-year), while information services (PAP, TVN 24) report that EU law has been violated by the Supreme Court Act in Poland. Therefore, the relatively high PMI reading (54.2 points vs. the expected 53.0 points) is of little help, especially as the export component did not impress, which does not seem to be a good sign for months to come either. As a result, the scenario of the weak zloty is clearly being implemented. There are still no signs that this trend could be reversed quickly either.