Tight ranges hold in spite of trade turmoil

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27 August 2019


Trump’s penchant for injecting volatility in financial markets through intemperate tweets has so far created two-way range-bound markets in G10 currencies, although emerging market currencies have had a tougher time.

he Jacksonhole central banker meetings last week did not add much new information about future policy, so all attention is focused on the trade front for now. Tit for tat retaliatory tariffs between China and Trump are set to take effect on September first, but as this is written Trump appeared to be making conciliatory sounds.

In addition to the unpredictable headlines from the trade front, investors will be paying attention as to whether the resultant uncertainty filters through to the actual economic numbers. There is some evidence of this happening in Europe, less so in the states. Inflation numbers out of the US and the Eurozone should also provide for some market volatility by Friday.


The latest headlines from the Brexit negotiations seemed to reassure markets that a no-deal outcome was at least marginally less likely, leading to a rebound in Sterling over the last couple of weeks. The spotlight is now on the opposition and its intention to block a no-deal Brexit as soon as Parliament reconvenes in September. We do not think the Brexit issue can be resolved without a general election and therefore expect volatility in Sterling to pick up significantly over the next few weeks. Meanwhile, backward looking economic numbers are likely to be ignored by markets.


Business sentiment across the Eurozone appears to be stabilising at a level consistent with modest economic growth. However, a large gap has opened up between the manufacturing sector, whipsawed by uncertainty over global trade and services. The Euro has held in a tight range over this period, as markets wait for the key September ECB meeting and the expected announcement of further stimulus measures. We will be paying attention to the Eurozone inflation release on Friday morning for any signs of the long awaited upward trend in core inflation.


So far, Trump trade tirades have had the opposite effect he intended. The dollar has only strengthened against emerging market currencies, particularly the Chinese Yuan which has had the worst month since 2005. There is no sign in trade numbers that the tariffs are having any positive effect on the US trade deficit. Further, even modest sell offs are obviously rattling to the Trump administration. That’s why we continue to expect a successful resolution of the trade conflict and a recovery in emerging market currencies against most G10 ones.


The Zloty has not been immune to the emerging market currency sell off during August. We think that the arguments for a Zloty recovery are quite strong. The rate differential with the Eurozone continues to grow. Further, job market strength defies expectations, and the clear upward trend in inflation measures show that the economy is operating at, or above, capacity. We expect that the NBP will resist calls for further rate cuts and that Zloty attractiveness will be enhanced by the coming ECB cuts in September.