Daily analysis 21.10.2016:
Mario Draghi’s press conference from yesterday clearly changed the euro’s evaluation in the global market. The EUR/USD is at its lowest level in six months. The zloty remains weak against the main currencies. The dollar is nearing the level of 4.00 PLN.
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 significantly impact the analyzed currency pairs.
Chaos and euro’s wear-off
We took note yesterday that a relatively dovish message from the ECB may take the EUR/USD to the area of 1.09. However, the road to this destination was quite bumpy. The chaotic behavior of the main currency pair at the beginning of Draghi’s press conference, was mostly caused by quite unreal expectations from some of the market participants.
Some investors expected to hear more information regarding an exiting from quantitative easing, instead of Draghi’s suggestions of the QE extension. Draghi’s statement that the monetary easing won’t last for ever caused the main currency pair to increase to the level of 1.1040.
The following minutes were more predictable. Basically, each statement regarding the QE from the ECB chairman could suggest that the assets purchase program would be extended in December. The most vivid proof was Draghi’s statement that, “we had a discussion within the Board of Directors regarding how to overcome the insufficient amount (of bonds in the market – author’s footnote), if it creates a problem. However, it’s not a problem for the time being.”
This could suggest that if the ECB currently has no problems with purchasing bonds that fulfill the QE conditions, the discussion regarding these problems wouldn’t be necessary unless an extension of quantitative easing wasn’t planned. Therefore, this is an indirect answer to the question - will the ECB extend quantitative easing in December? The answer is certainly not positive for the time being.
Euro is weaker. What about other currencies?
The market needed some time to cope with the fact that speculations regarding the QE limits are definitely premature. As a result, the EUR/USD went below 1.1950 shortly after the press conference and the level of 1.0900 hasn’t been exceeded until the beginning of the Asian session.
The milder monetary policy of the ECB has also been confirmed by the behavior of the euro zone’s debt instruments. The German 10-year treasury bonds increased to 0.07%, only to decrease to a negative level after 17.00 (5.00 PM). The euro was weak against the pound as well. The EUR/GBP went down from 0.8960 - below the level of 0.8900.
A lower evaluation of the European currency has partially translated to an appreciation of the dollar basket. DXY is currently approximately 0.5% higher than it was yesterday afternoon. However, it’s worth noticing that this is mostly the result of the basket’s construction (the euro has more than 50% contribution.) The dollar didn’t gain value against the pound, nor against the yen. Profitability of the American two-year treasury bonds this morning were also near their levels from before Draghi’s statement.
This also goes to show that the EUR/USD may continue its depreciation. However, this is not because of the euro’s weakness. This is because of the dollar’s strength and an increasing probability of rate hikes in December, as well as of two rate hikes in 2017. Although, it’s still too soon to expect to see the main currency pair testing the minimum from the past quarters (the area of 1.05).
Zloty didn’t benefit from milder euro
Our expectations regarding a mild message from the ECB, as well as regarding the EUR/USD depreciation was realized. However, these factors didn’t cause the EUR/PLN to decrease. Taking into consideration the euro’s global wear-off and increasing chances for extension of accommodative monetary policy within the eurozone, this was relatively neutral behavior.
This theoretically may be related to yesterday’s data regarding the capital’s outflow from the emerging markets. According to the EPFR studies (cited by the Financial Times), the outflow of the capital which was denominated in the local currencies was at the level of 727 USD. This was the highest level since January. This was also confirmed by the behavior of the forint. The Hungarian currency also wasn’t gaining value after the ECB message.
On the other hand, the debt instrument market remains relatively stable. Moreover, we could see a decrease in the profitability of the local bonds over the past few days. Therefore, the matter of a weaker euro remains quite mysterious, especially considering that the global moves were not caused by the dollar’s appreciation and a higher likelihood of monetary tightening in the USA.
The general wear-off of the zloty is causing the EUR/PLN to slowly reach the level of 4.32-4.33. Moreover, the American currency is increasingly closer to exceeding the level of 4.00, because of the EUR/USD depreciation. It only takes a series of macro data from the USA, which will be slightly better than the consensus, for the dollar to cross this psychological barrier.
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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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