Afternoon analysis 02.12.2014

The zloty posted some significant gains before the MPC rate decision. The euro dropped after speculations about the ECB launching the full QE on its December meeting. The rouble moved near its record low levels.

On Thursday the European Central Bank is to unveil its rate decision. According to some analysts, the monetary authorities may launch the full quantitative easing – asset purchases programme that includes government bonds – at this meeting (a wider view on this in our morning commentary).

However, the likelihood for additional actions from the ECB is rather small. Although the ECB president Mario Draghi has repeated many times that the QE is possible, he never gave any schedule. Conversely, ECB vice-president Vitor Constancio said that the first quarter of 2015 will be appropriate to asses whether additional stimulus is needed.

In December the second round of TLTRO tender is planned. September's auction was somewhat disappointing as lenders made bid for about 80 billion euro. However, the current situation is different due to asset purchases conducted by the ECB that helped to improve balance sheets of financial institutions. This factor was cited earlier as a possible catalyst of higher demand.

The recent data from the euro zone unveiled a poor economic landscape. Reports proved that the need for additional stimulus is still relevant. Private loans growth was negative – it stood at minus 1.2 percent on a yearly basis. In addition, the inflation growth was 0.3 percent – the lowest level in five years. And the PMI reports for major economies – including Germany – fell short to meet expectations.

Mario Draghi's press conferences often push the euro lower. This time the scenario may be similar as ECB president will be asked how the central bank plans to battle low inflation when the oil price plunge. According to Bundesbank president Jens Weidmann, cheap oil is like a stimulus package. So the discrepancy between Draghi and Weidmann is still viable, what makes a case for full QE more difficult.

The rouble tumble

After Bank of Russia intervention on Monday, today the rouble is back at the bottom. The Russian currency moved to almost record low levels against the euro and dollar.

Today Russian government unveiled its negative outlook for the economy by saying that the recession is expected in 2015. In addition, the country will face significant capital outflows. Households and firms struggle with eight percent inflation and currency crisis. Sanctions imposed on Russia over Ukraine are very harmful. Thus, ample currency reserves and low public debt are not sufficient to shore up currency.

The zloty's momentum

After solid economic data – the GDP growth composition was positive and PMI exceeded expectations – the likelihood of interest rates cut on Wednesday's Monetary Policy Council meeting is very low. This factor coupled with heightened risk appetite (stock indices rose and DAX hit record high) created favorable environment for the zloty.

The Polish currency posted significant gains against the euro and franc. The EUR/PLN dropped below 4.16 for the first time since July 2014. The increase against the pound was a bit smaller. And the zloty dropped against the dollar. If there is no surprise from the MPC, the zloty will extend gains.

However, a press conference of NBP president Marek Belka after rate decision announcement poses some risk to this outlook. Belka said that there is room for additional cuts as inflation is far from central bank's goal. Although the strength of dovish wind in the MPC is not enough to cut rates, if Belka stresses the need for lower rates, the zloty may drop for a brief time. This factor will be not valid in longer term.