Afternoon analysis 04.03.2015

Weaker zloty after unexpected rate cut by the MPC. The euro near its lowest level since 2003 and not favorable sentiment in the broad market also pressured the Polish currency.

The euro dropped against the dollar. The EUR/USD hit 1.1104 – the lowest level since January. If the euro declines further, it will hit the lowest level since September 2003.

Currently the common currency has no clear arguments against the dollar. The major source of weakness is quantitative easing that starts next week. On Thursday the European Central Bank will decide on rates. Any change of its stance is expected, but the ECB president Mario Draghi press conference will be important.

ECB president may be asked how recent improvement in the economic data affects the outlook for the quantitative easing. Earlier some ECB members have said that the QE may be extended if likelihood the central bank meets its target diminish.

Now, however the economy is getting better just before the QE is introduced. As a result, the Bundesbank may again question the necessity of bond purchases. It is even possible, that the German central bank will try to limit the program if the economy performs better than expected. Any remark from the ECB president that a similar scenario is possible, may strengthen the euro.

Eurostat said that retail sales rose 1.1 percent – a better result than expected. It was also more than in previous month, when sales increased 0.4 percent. It was next report that exceeded expectations. Earlier private credit figures, unemployment rate and inflation growth all were better than expected. However, today's PMI reports from service sector were rather mixed.

Solid labor market

ADP report on employment change in private sector missed expectations. Companies added 212k – less than forecast. However, numbers from previous week have been revised up to 250k from 213k.

Today's report is a good benchmark for Friday's data on employment situation from the Labor Department. Last year was the best for the labor market in fifteen years. Thus, a next equally good year is not likely. A steady employment increase above 200k satisfies the Federal Reserve – as a result the monetary authorities will pursue plan to rise rates in mid 2015. That puts the dollar in position to extend gains against all major currencies.

RPP surprised

The Monetary Policy Council surprised by cutting rates by 50 basis points – more than 0.25 percentage point expected. Last time when the MPC cut rates in October the move was similar. Now the major rate level is 1.50 percent – the lowest level in history.

The MPC signaled that it has finished the easing cycle. Monetary authorities stressed that the decision was an adjustment to other central banks decisions after the ECB decided to launch QE.

The zloty dropped just after decision was released, but later the statement of the MPC pushed higher the Polish currency. The appreciation potential of the Polish currency was strengthened, especially when demand for risk assets increases. The EUR/PLN dropping to 4.10 is currently a likely scenario.