Daily analysis 08.09.2016:
The European Central Bank's meeting is the main event today. Possible scenarios of the ECB announcement. Relatively hawkish message from the Monetary Policy Council is helping the zloty to keep its recent growths against the main currencies.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 13.45: The ECB decision regarding interest rates (estimations: 0.0% unchanged; deposit rates negative 0.4%, unchanged).
- 14.30: New macroeconomic projections and the announcement from the ECB.
- 14.30: Mario Draghi's press conference after the ECB meeting.
- 14.30: Weekly jobless claims from the USA (estimations: 265k).
The European Central Bank (ECB) has increased its monetary stimulation package six months ago. It has decreased interest rates and the scale of assets purchase has been increased from 60 billion to 80 billion euro per month (including corporate bonds). In order to improve the mechanism of cheaper loan transmission, the Bank decided to activate the TLTRO II operation. This allows the commercial banks to get loans from the ECB with a negative 0.4% rate for four years maximum.
Currently, it's very unlikely that the basic elements of this program would be modified. However, the market will focus on other elements. They may not be very significant for the economy, but they can cause significant moves in the debt instruments market, as well as on currencies.
Primarily, the running assets purchase program ends in March 2017. However, its extension is widely expected. Twenty-two out of fifty economists that were surveyed by Bloomberg agency, thinks that this extension may happen today. Eight of them thinks that the ECB will make this move in October and eleven of them assumes that it will happen in December.
In our opinion, the QE extension may happen today. New macroeconomic projections for 2017, will most likely show slightly lower inflation and economic growth, in comparison to estimations from June. This will be a good argument to extend the QE. Moreover, if this decision is not made, we can expect a clear consolidation of the euro. This could limit the probability of inflation reaching its target in the forthcoming months. The QE extension would also show that the ECB has things under control and despite that the views of particular central bankers are dissonant, the Bank alone is able to develop a consensus relatively quickly.
The second element that the market is taking into consideration today, is the possible modification of the rule stating that the ECB does not buy more than 33% of bonds that have been issued by a particular country and that profitability of these instruments has to exceed the deposit rate (negative 0.4%). Considering that some countries have recently limited issuing of bonds significantly and that profitability of the short-term bonds are at a lower level than negative 0.4%, the central bank may experience difficulties in purchasing the bonds.
It seems that these matters will not be a crucial problem over the next few months. Additionally, the policy of central banks consists of psychological elements as well. The market should be aware that the ECB has a possibility to use the tools that are able to ease the monetary conditions, without modifying the entire monetary policy. Therefore, both of the above elements will most likely be modified on today's meeting.
The market is clearly divided when it comes to the date of extension of the assets purchase operation. However, it is not divided regarding the view that the extension will occur in the near future. Therefore, if it is introduced today, this may wear-off the euro slightly. However, the reaction should not by strong. On the other hand, if this move is postponed, this will probably strengthen the euro. However, it is unlikely that the European currency will go beyond the 1.1350 level.
We may expect significant changes, if the limit of the assets purchase (33%), as well as the limit regarding profitability are varied. If this happens, we can expect a clear decrease in profitability of treasury bonds in the entire euro zone. This concerns especially bonds with short term of maturity. This would be a negative impulse for the euro, not only because of potential extension of assets purchase, but also due to a clear determination from the ECB. The EUR/USD could reach the 1.1150 area in this scenario.
In conclusion, we only expect the ECB to extend the QE program beyond March 2017 (probably by six months). This would be a slightly negative signal for the euro. However, the chances for going below 1.1200 are limited. It's also very likely that this decision will be postponed onto the fourth quarter. If this happens, we can count that the EUR/USD would test the 1.13 level.
The other solutions seem relatively unlikely. However, we cannot exclude them at this stage. As usually, the more additional stimulative elements, the larger the risk of the euro's wear-off. However, it seems that today's meeting should not be very surprising. Therefore the general market reactions should be limited.
Quite hawkish MPC
In our previous analyses, we took note that the press conference after the MPC meeting may be quite hawkish. This was a result of our opinion that the resignation of doctor Chrzanowski (his views regarding the monetary policy were relatively restrictive) should force the Council to present a more consistent view, in order to cut the speculations that the resignation has been caused by reasons other than personal.
We may claim that this has actually happened. Professor Glapiński clarified that the chances for a decrease in interest rates are very small and monetary tightening should be the next move. He also suggested that a moment to consider rate hikes is the end of 2017.
Even though the press conference has not caused the zloty's value to grow, the FRA 6x9 contracts went up by 5 base case points to the level of 1.65%. Therefore, they basically don't estimate a decrease in interest rates anymore. If the future monetary conditions abroad are milder than expected, this may be an argument for the zloty to stabilize or to strengthen.
Today's ECB decisions should not have a clear impact on the PLN. Of course, the milder Mario Draghi's announcement will be, the larger the chance for the EUR/PLN to go down. However, the decision of Moody's is more important for the time being. If the decision is positive for Poland (this is our base case scenario), the euro would cost less than 4.30 PLN at the beginning of next week.
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