Daily analysis 07.11.2014:
Much more dovish ECB comments overprices the euro, now at 1.24 USD. Speculations on the rouble know no end. The regional sentiment weakens due to the risk of escalation of tensions in Ukraine. The US labor market data in the centre of attention- The zloty weakens after the initial strengthening due to the geopolitical threats.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30 CET: New jobs in the non-agricultural sector (survey: +235k; unemplyment: 5.9%; salary growth monthly: +0.2%.
ECB. Rouble. Ukraine. Labor market
Yet another good speech from Mario Draghi. The President of the European Central Bank has put an end to the speculations of the media regarding his weakening position in ECB (those who believe in conspiracy theories might think that this was the whole purpose of the leak from Reuters). It should give order to future actions of the monetary authorities stationed in Frankfurt and improve their actual effectiveness.
The President of the ECB also used recent commotion to emphasize the dovish accents in his speech. The Bank's statement stated that the assets from the ECB balance will increase and reach the level from the beginning of 2012. The summary of the meeting of the Board of Governors also reads that the technical preparations will begin to set the further stimuli elements in case there is a need to introduce them in the future.
During the conference Draghi made it clear that the central bank's balance should reach the level from March 2012 within two years (that is about 1 milliard euro), putting an end to the speculations about using the word 'beginning' and whether it refers to January or other months as well. The president of the European monetary authorities emphasized the fact that the document prepared yesterday was signed by all of the ECB members, so - if there is such need - they are ready to enlarge the monetary stimulation.
The answer to a question about the corporate bonds purchase and suggestions of Ben Bernanke about ECB having political and legal issues with introducing the quantitative easing (buying sovereign debt) was at the same time important and very dovish. Draghi commented that he doesn't second the Bernanke's worries and that 'if we proceed according to out mandate, we can use various instruments. The important thing is to always act in accordance to the mandate. We believe that what isn't the debt financing, stays within our mandate'. Briefly speaking, the ECB is open to purchase any instruments, incuding treasury bonds. The only difference is, that these will not be purchased on the primary market, but on the secondary one (whether if that does make a difference or not, let's leave out of the argument).
The ECB comments included only dovish signals, which not only brings closer the increasing of the QE with the intrument already used, but also clear suggestions that Draghi and his colleagues will use other available tools without hesitation only to stimulate the inflation. The reaction of the market to EUR/USD was totally understandable, and fall to the levels of 1.2400 clearly reflects the risk of the QE in the beginning of 2015.
On the other hand, it is hard to figure out the goal of the Russian central bank actions. Only today CRB allowed the speculants to weaken the rouble by almost 5% and then watched the equally strong reverse movement. Does the president of the monetary authorities in Russia have some clever plan to let the speculants 'bleed out'? It is hard to set forth an example level which, when reached, triggers the intervension. The current situation has every characteristic of a currency crisis. How else can one call a 10-percent sell-out of a domestic currency in only three days?
The situation in the East uf Ukraine gets worse. After first day of the elections in Donetsk and Luhansk and after the reactions of both parties of the conflict it was clear that lack of agreement about the date of the elections can trigger the return of military action. This negative scenario is now slowly coming to life. Kiev accused the separatists of the attacking Ukrainian forces, whereas the rebellious army claims that the Poroshenko military forces are the ones attacking. Kremlin also chimed in, with a statement which can be found on the official website of the Russian president. It describes the Thursday meeting of Putin and the representatives of the Security Council. It reads that the topic of the discussion was 'the situation in Donets Basin in reference to multiple infringements of the cease-fire by the Ukrainian military forces'. It is probably yet another preview of Kremlin involvement in the conflict and increase of the risk aversion in the region.
Summarizing, yesterday's dovish comments from ECB set the moods for EUR/USD. The main currency pair is very likely to close the week below the level of 1.2400. Currently only very weak data from the US labor market could cause the dollar pairs to rebound (that is less than 200k on the payrolls and downard revision of the data from 2 previous months by at least 30k). In order to continue the fall (towards the levels of 1.2350) it should be enough to surprise with over 250k, providing that the surveys showed 235k and over-a-dozen-thousand upward revision of the August and September readings.
Monetary policy and regional tensions
Despite the fact that the signals from central banks were positive for the domestic currency, the tensions in Ukraine, which also have effects in our region, would not let PLN strengthen.
It was clearly visible after the Monetary Policy Council decision concerning the interest rates on Wednesday, when EUR/PLN would try to go below 4.2200, just like after yesterday's news regarding ECB. As one cannot expect positive news coming from the East of Ukraine, the domestic currency is unlikely to generate 0.02-0.03 PLN raise, which would be caused by changes in the monetary policy between Poland and the euro zone.
Moreover, one shouldn't also count on a significant growth of the value of PLN after today's publication from the Labour Department. Even if the data from over the ocean are worse, EUR-PLN is unlikely to go below 4.2200 and CHF-PLN will most probably stay above 3.50. If the payrolls are positive though, USD-PLN might strengthen above 3.40.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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