Daily analysis 20.11.2015:
Yesterday's minutes from the eurozone and today's testimony of the European Central Bank (ECB) chairman Mario Draghi, practically confirm an increase in monetary stimulation in December. The zloty remains weak to the pound and the dollar, and stable to the euro.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- No macro data that could have a significant impact on the analysed currencies.
Double hit from the ECB
During the past 24 hours the market received two important publications, which practically confirm the European Central Bank conducting an increase in, as well as an extension of the quantitative easing operation. Additionally, there is a big chance for a visible decrease in the Bank's deposit rate.
Yesterday's publication of October's ECB meeting indicates that the risk regarding inflation reaching its goal is directed towards the slower appreciation of consumer prices. The European monetary authorities also suggest conducting a review of the monetary easing program during December's meeting.
Quite a wide discussion occurred regarding the reasons of the low level of inflation. And not only the general level, but also inflation without fuel and food. This is partly a result of the lack of global inflation, which might be caused by structural changes like technology, consumer behaviour, or competition. However, an increase in prices in the eurozone, which is significantly lower than the goal, is also a result of low economic growth and a high level of unemployment. Justifying the necessity to review the monetary policy, the ECB is also taking note of the risk of slowdown in the emerging markets.
Suggestions from October's minutes were developed during today's testimony of Mario Draghi. The ECB chairman positively evaluated the effects of quantitative easing. In his opinion not only did they support the assets market, but also the real economy by decreasing the cost of rates by 70 base case points in the countries at the eurozone's core and by 110-120 base case points in the peripheral countries.
Draghi also took note of the significantly weak revival in the eurozone. Historically, the economies needed between 5 and 8 quarters for their GDP to reach the peak of the previous business cycle. This time the USA needed 14 quarters, and the eurozone will reach the GDP from 2008 at the beginning of 2016, which gives the total of 31 quarters.
Unsatisfying economic growth, the long term maintenance of inflation below the goal, and also a significant risk of lower readings of the above indexes can cause the ECB to decide on an extension of QE as well a decrease in deposit rates in the future.
One of Mario Draghi’s last remarks deserve special attention. “If we decide that the current course of our policy is not enough to reach the goals (mainly a stable level of inflation below, but close to 2% - author's footnote), we will do whatever it takes to raise inflation as soon as possible”.
The above statement is not only similar to what Draghi said one year ago (before the announcement of the QE in the eurozone), but is also reminiscent of his renowned declaration that he will do whatever it takes to save the eurozone. In the context of the currency market, this may be a signal that the power of further monetary actions (which can be announced in December) are still not completely calculated in the prices. Probably this, apart from the general strength of the dollar, will be one of the elements which should take the EUR/USD towards the level of 1.00 in the mid-term.
Few words about the foreign market
Yesterday's minutes and today's testimony of Mario Draghi show that the EBC is determined to take inflation close to the 2% goal of the central bank, and also to support economic growth. This may mean that December's decision of the European monetary authorities will exceed the market's expectations, and will consist of a significant increase in the QE, extension of monetary easing beyond September 2016 and also a visible decrease in deposit rate. The determination of the ECB also kindles the assumption that the euro may be under constant decrease pressure. This may relatively quickly lead the EUR/USD towards the level of 1.00, and at the same time cause any correction to be relatively short and shallow.
Weakness of the zloty maintains
Assuming that the mild message from the ECB will not increase expectations for a decrease in interest rates in Poland, one could expect an enforcement of the national currency. Currently, due to the exchange of the majority of the MPC members at the beginning of 2016, the market is not sharing this opinion, and the zloty depreciates on the global market along with the euro. However, if it appears that the new personnel of the MPC is not as dovish as some expect, the EUR/PLN has a chance for a stronger decrease and even going to the area of 4.15.
It will be significantly harder for the zloty to gain value to the currencies of countries, which are announcing increases in interest rates, and these are the pound and the dollar. In this case, even if the MPC leaves interest rates at the current level, a stronger work off of increases in the USD/PLN and GBP/PLN is currently very unlikely.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/USD rate:
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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 Cinkciarz.pl Sp. z o.o is prohibited.
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