Afternoon analysis 03.12.2014

As expected, the Monetary Policy Council left interest rates unchanged at record lows. The zloty little changed after decision on rates. The Bank of Russia intervened to tame the rounble plunge. The EUR/USD fell before ECB meeting.

Retail sales in the euro zone haven't given any positive sign of recovery. Eurostat said that sales rose 0.4 percent from a month ago and 1.4 percent on a yearly basis in October. It was a bit worse than 0.5 percent and 1.4 percent expected, respectively. In the preceding month growth stood at minus 1.2 percent on a monthly basis and 0.5 percent from a year ago.

The latest data from euro zone looked rather poor. Since June, when the European Central Bank introduced first stimulus measures none of pivotal economic reports have improved. The GDP growth is lackluster, the unemployment rate remained near its record high and PMI reports signaled deterioration. Moreover, the private credit growth was negative.

The EUR/USD fell to its lowest level in 27 months. The common currency dropped due to mounting speculations that the ECB at its tomorrow's meeting may announce additional measures aimed at restoring growth and warding off deflation risk (a wider view in our recent commentaries). Nevertheless, in spite of meeting outcome, market volatility will be heightened.

The US data slippage

The ADP report on employment change in the US private sector was worse than expected. Readings were released two days before crucial data from the Department of Labor. However, the overall appraisal of the US economy based on today's report is still very good, the slippage may be taken as an announcement of weaker Friday's report.

According to the ADP, employment rose 208k – less than 228k expected. The growth was also smaller than 233k in the previous month.

On Friday the Department of Labor releases its monthly report on labor market condition. Employment in non-farm sector is expected to growth 232k after adding 214k in the previous month. If expectations are met, it will be 10th employment growth above 200k in a row. It hasn't happened since a decade.

Russia intervened

The Monday's intervention on the rouble market by the Bank of Russia have had a brief influence on the currency. Speculative investors needed only one day to send the rouble at new lows. As a result, Russia conducted second intervention this week on Wednesday. According to traders in the market, Russia spent from 600 million dollar to one billion to spur currency.

However, likelihood of taming the rouble slide for a longer time is low as the oil prices decline and Western sanctions imposed on Russia over the Ukrainian crisis are in place. The rouble plunge may be tamed by the Bank of Russia interventions but this factor has limitations in amount of currency reserves that were depleted by 90 billion dollar this year.

The zloty may gain

As expected, the Monetary Policy Council left the interest rates unchanged at 2 percent – the lowest level in history. Monetary authorities didn't change key rates despite record low inflation – the Central Statistical Office said that inflation gauge fell 0.6 percent on a yearly basis. Conversely, recent key data pointed at no cut – the GDP growth was compelling and PMI report posted significant gain.

Given current circumstances – solid GDP and PMI, MPC inaction and quite good sentiment in the broad market – the zloty has potential to growth.