Daily analysis 04.12.2015

, author:

Marcin Lipka

Why was yesterday's reaction of the currency market so sudden? Data from the American labour market are in the centre of attention, although they should not change the Federal Reserve's approach on the December's meeting. Weakness of the zloty is very well seen in relation to the Hungarian forint.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 14.30: Data from the American labour market. New jobs in non-agricultural sector (estimations: +200k). Unemployment rate (estimations: 5.0%). Average change in the hourly wages (estimations: +2.3%).

Unfulfilled expectations

Yesterday's volatility on the currency market, reminded of the one observed during the peaks of the financial crisis. An increase in the EUR/USD during a single session itself was highest since 2009. But what did cause such significant fluctuations on the main currency pair?

First of all, it is worth reminding what were the ECB members suggesting during the past few weeks. At October's meeting Mario Draghi said, “we can change the size, composition, and a plan of every instrument of monetary policy, if there is such necessity”. In mid November Peter Praet, a member of the Board and the main ECB economist, claimed that he sees the risk related to expectations regarding inflation. Few days after Praet's comments from his official testimony in Frankfurt, Mario Draghi stated “we will do all it takes to raise inflation as soon as possible”.

The above mentioned elements combined with other testimonies and incoming macrodata, caused the market to expect a very clear monetary easing. Additionally, it was expected that economists' expectations will be crossed, considering the past decisions of Mario Draghi.

However, reality appeared to be completely different. A decrease in deposit rate by 0.1% itself, appeared in the lower limits of consensus in the survey conducted by Bloomberg. During the press conference it appeared that the ECB will extend the QE program until March 2017. However, it will not change the value of monthly purchase of assets.

As a result, the total of the QE program appeared to be smaller than expectations by approximately 250 billion euros. Additionally, the lack of confidence from the ECB could be considered by the market as an increase in significance of the hawkish fraction of the central bank, focused around the German representatives. This may also suggest weaker decision abilities from the monetary authorities in the future.

Another fact is also worth noting. Up until now, Mario Draghi had a good contact with the financial market, which made conduction of the monetary policy easier. This opinion lasted for more than 3 years. In mid 2012, Draghi claimed that he will do anything it takes to keep the eurozone active. This caused a significant decrease in disturbance on the currency market, and as a result no further actions needed to be conducted.

On the other hand, yesterday's events are not necessarily taking away the chance for the EUR/USD to reach the level of 1.00. However, this movement is currently less likely than it was 24 hours ago. Even if value of the euro reaches the same level as the dollar, it will be a definitely longer and volatile process, than it could be expected before the ECB meeting.

Data from the labour market

Even though today's publication of data from the American labour market is significant, and even Janet Yellen emphasized its importance, there are small chances that the payrolls will change the Fed's decision in on December's meeting. It is possible that not only the November's data would have to be significantly worse than 100k. Downwards review of October's data should also be significant. Also, publication regarding unemployment rate and an increase in wages would have to be a negative surprise for the market.

Chances for this scenario to fulfil are small, especially that the ADP data were close to the limit of 200k. Despite the fact that the market cares less for this data, both of these readings practically overlap. Thus, we should expect the readings that are rather closer to the consensus. If the payrolls are higher than 250k, it is possible that a more serious discussion about a pace of monetary tightening will begin. This should be a positive sign for the dollar. However, due to yesterday's events a depreciation below 1.0800 is very unlikely.

Few words about the foreign market

Non-fulfilment of market's expectations regarding the yesterday's ECB meeting, may even have mid-term consequences for the EUR/USD. Chances for a depreciation to the level of 1.00 decreased significantly, and an impact of statements from the particular ECB members will probably weaken within following months. Today's data from the American labour market may initiate a serious discussion about a pace of monetary tightening in the USA. This matter should dominate the behaviour of the USD in following quarters.

Weakness of the zloty

Yesterday's sudden reactions on the currency market, also translated to evaluation of the zloty. The dollar depreciated below 4.00, and the franc tested the level of 4.00 during a very incoherent trade. On the other hand, reaction on the EUR/PLN was quite surprising. Even though with smaller expectations regarding the QE from the ECB there were expectations that the euro will enforce to the currencies of our region, the presence of the EUR/PLN in the area of 4.34 was probably a surprise.

One may even assume that Thursday's volatility revealed a general weakness of the national currency. It is also confirmed by the behaviour of the zloty to the forint. Yesterday, the PLN was close to the lowest level to the Hungarian currency for almost two years. This only shows that the local matters related to uncertainty regarding fiscal and monetary policies depreciate the rate of the zloty by approximately 2-3%. Because of this the euro and franc are more expensive by approximately 0.10 PLN, in comparison to the situation in which the above effects do not exist.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.0850-1.0950 1.0750-1.0850 1.0950-1.1050
Range EUR/PLN 4.2800-4.3200 4.2800-4.3200 4.2800-4.3200
Range USD/PLN 4.0000-4,0400 3.9600-4.0000 4.0400-4.0800
Range CHF/PLN 3.9200-3.9600 3.9600-4.0000 3.9000-3.9400

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5050-1.5150 1.4950-1.5050 1.5150-1.5250
Range GBP/PLN 5.9600-6.0000 5.9400-5.9800 5.9800-6.0200

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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