Daily analysis 11.03.2016:
The package of monetary easing from the euro zone appeared to be wider than the market's consensus expected, but the euro did not clearly gain on value. Did Mario Draghi make a mistake during the press conference? Today's meeting of the MPC should be relatively neutral for the zloty.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 16.00: Press conference after the meeting of the Monetary Policy Council.
Yesterday at 13:45 (1:45PM), the European Central Bank (ECB) announced a significant modification of the monetary policy. The ECB increased the purchase of assets in the market from 60 to 80 billion euro per month, and added a possibility of purchasing corporation bonds with an investment rating. Moreover, it decreased interest rates, including deposit rates by 10 base case points to negative 0.4%.
The ECB also decided that in June 2016, a round of TLTRO II operation will begin. These are the instruments for depreciation of the financial costs, directly for the real economy. According to the information included on the ECB website, “these operations can be conducted with a rate as low as the deposit rate in the central bank at the end of the day.” Currently, it is negative 0.4%.
The package presented by the ECB was definitely more aggressive than the majority of the market had expected. It was proved by the market's reaction – the EUR/USD dropped from the area of 1.0970 to 1.0830. However, it all started changing during the press conference. It is difficult to say, whether the interest rate market, or the currency market reacted more rapidly. However, at approximately 14:50 (2:50PM) a sudden rebound on the EUR/USD occurred, and profitability of treasury bonds of Germany, among others, increased significantly.
The moment of work-off overlaps the answer of Mario Draghi to one of the first questions. The ECB chairman claimed that, “from the current perspective, and considering a supportive character of our actions for increase and inflation, we do not expect the necessity of further depreciation of interest rates.” Draghi also said, that a multi-gradual system for the deposit rate was discussed, but the monetary authorities decided not to use it in order not to announce a possibility of decreasing interest rates as low as the ECB wishes.
As a result, some of the market participants interpreted this as a definitely lower chance for cutting interest rates in the future. The Bloomberg agency calculated a probability of a decrease in the euro zone to negative 0.6% in December 2016, and in comparison to the Wednesday quotations, it decreased from 24% to 5.3%.
Profitability of the German two-year treasury bonds decreased from negative 0.54% to negative 0.45%. However, the basic question is: did Mario Draghi make a mistake yesterday, or is a higher profitability actually a positive sign? According to the market, it takes the risk of a too-low inflation further. This, on the other hand, may suggest an acceleration of the economic growth.
However, one of the recent statements of Draghi may be an argument for the topic of a small chance for a further decrease in interest rates. The ECB chairman explained his previous statements, and confirmed that he does not expect a decrease in interest rates to be necessary from the current perspective. He also added that, “the new facts may, of course, vary this perspective.” However, this information was completely ignored after significant changes in the market.
On the other hand, yesterday's reaction of the future interest rates market, can be interpreted theoretically as positive. The market begins to estimate that perhaps the real economy will finally react to the monetary stimulation. However, can this information be considered as positive regarding currencies?
In the long term, the answer is most-likely yes. However, in the mid and short term, the actions from yesterday should not cause an appreciation of the euro, especially against the dollar. Moreover, the difference between interest rates of the euro zone and the United States did not extend significantly. This is because the profitability of the American treasury bonds also gained clearly, by reaching approximately 0.95% on the two-year bonds.
It is also worth noting, that if the Federal Reserve comes to a conclusion that economic dangers from the euro zone are decreasing, it may be more willing to sustain its policy of monetary tightening. As a result, despite that the message from the ECB was not entirely dovish as it was suggested by the publication from 13.45, the actions of the central bank, however, do not give arguments to expect further significant increases on the EUR/USD. They rather increase the chances for the main currency pair to remain under pressure in the forthcoming weeks.
MPC leaves interest rates unchanged
Yesterday's events on the global market that were related to the ECB decision also had an impact on the zloty. However, these moves were significantly smaller than in the case of the main currency pair, even though the amplitude of fluctuations on the EUR/PLN was approximately 0.05 PLN. However, along with an increase in appetite for risk and a slight depreciation of the EUR/USD, the euro descends to the range of 4.31-4.32 since morning.
A slight strengthening of the zloty was also observed after the announcement from the MPC regarding leaving interest rates at an unchanged level. However, this decision was expected, especially considering that practically none of the Council's members suggested a depreciation in the past weeks. In our opinion, the announcement should also not be a surprise, and the EUR/PLN should remain near the range of 4.30-4.32.
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