Afternoon analysis 24.02.2016:
Bundesbank President Jens Weidmann warned that more easing may pose risk to the economy. Risk aversion prevailed in the markets. The zloty is steady in spite of an adverse market environment.
The March European Central Bank meeting is scheduled within two months. As the meeting gets closer, the volatility will increase. It is due to the fact that in January, ECB President Mario Draghi has announced the monetary policy revamp. Given recent developments (weaker macroeconomic reports, drop in commodity prices, heightened volatility in the financial markets, risk associated with the Brexit scenario) the expectations for more stimulus are rather strong.
On Tuesday, Swiss National Bank President Thomas Jordan warned that the monetary policy has limits. The policymaker cited interest rates which could not be cut endlessly. His remarks were important in the context of the ECB meeting, which may increase appreciation pressure on the franc if the ECB adds to the stimulus. The franc increased after Jordan's comments, and the move continued today.
Bundesbank President Jens Weidmann said that more stimulus may result in negative side effects (according to Reuters). They would be too important to be ignored. Weidmann said that the eurozone economy would continue its recovery. His statement shows that the Bundesbank may not support additional stimulus. But rather, it would not be enough to stop Mario Draghi.
The financial market shows expectation for 10 basis points cut from the deposit rate. However, the major issue is the asset purchase program. Currently, the ECB buys assets for 60 billion euros on a monthly basis. Options that have been considered, are to increase the scope of eligible assets or to increase the monthly purchase limit.
The ECB will try to avoid repetition of the December scenario. Although the Frankfurt-based institution added to stimulus, it did not please the markets. As a result, the euro increased by the most since 2009 and the bond yields increased, as well.
The euro was under pressure. The EUR/USD dropped below 1.0960. It was the lowest level since the beginning of February.
Recent comments from the Monetary Policy Council limit the probability of interest rate cuts. Yesterday, Jerzy Osiatyński said the economic situation is quite good and the low inflation rate is beyond the scope of the MPC impact. A similar approach was presented by Łukasz Hardt, who sees no arguments for additional cuts. Hardt also said there is no threat to the central bank independence.
In contrast, the monetary policy easing may take place in Hungary. Although yesterday, the central bank left interest, suggesting that it may cut rates in the short term. Given the situation, the forint was weaker than the zloty.
The major risk factor is the uncertainty concerning the Brexit scenario. As a result, the pound dropped to the lowest level since March 2009. The oil price was hit by the statement of Saudi Arabia which limited the probability of output cuts. Given the adverse market environment, the session was quite successful for the zloty. The Polish currency managed to recoup some recent losses against its major pairs.
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