Afternoon analysis 05.09.2014

The euro is gaining ground after unexpected ECB move. The zloty extended gains after Thursday's rally. The dollar dropped as disappointing labor market data put the Fed in difficult position. Hope for peace in Ukraine spur risk-taking.

The European Central Bank implemented additional measures to spur growth and inflation. The ECB cut interest rates – the refinancing rate was lowered to 0.05 percent and the deposit rate was brought down to minus 0.2 percent – and additionally introduced the asset-backed securities purchases. In the meantime, the ECB is working on the TLTRO launch. The new measures were introduced to encourage a demand for credit in the eurozone. Until now record-low interest rates haven't increased the demand for loans due to heightened risk-aversion, according to the ECB.

The ECB President, Mario Draghi, said the central bank will purchase securities worth about 700 billion euros. The number was inferred from Draghi's comments on the plan to expand the size of ECB's balance sheet to the level it was at the beginning of 2012 – thus, the size of the balance sheet will grow to 2.7 billion euros from 2.0 billion euros .

Payrolls weakened the dollar

Employment numbers were worse than expected. In August employment in the non-agricultural sector increased by 142,000 – less than 225,000 predicted. The advance in employment in the private sector was only 134,000, lower than 208,000 expected. In the previous month, the employment increased by 212,000 and 213,000, respectively (after revision from 209,000 and 198,000 ).

The dollar fell against the euro after the data was released. The U.S. currency dropped also against the pound and the zloty.

Moreover, the employment figures put the Federal Reserve in a difficult position. The Fed planned to continue the withdrawal of unconventional monetary policy measures and interest-rate-driven monetary policy. However, if the next labor market data disappoint, the central bank might be forced to reconsider its agenda.

The pound remained weak

The Bank of England said inflation expectations increased to 2.8 percent in the third quarter of 2014 from 2.6 percent in the previous three month period. Although the data increase pressure to raise interest rates, the pound continued to fall. The sterling tried to curb loses after poor U.S. data, but eventually it dropped against the dollar and the euro.

From the perspective of the pound the key issue is the referendum on the Scottish independence. If the worst case scenario occurs, both the economical and political consequences will be unpredictable. The pressure on the pound was strengthened after the survey depicting a minority of opponents to independence, was released. The British currency is now at the lowest level since mid-February.

The zloty between the ECB and Ukraine

In the short term, after the ECB decision the zloty should rise against the euro due to the weakness of the common currency and increased risk-taking on the markets. The zloty will also rise against the frank – the Swiss currency appreciation potential is limited due to cap imposed by the Swiss National Bank. The direction against the dollar will be determined after the FOMC meeting in mid-September.

The Polish currency may also exploit hope for a political solution in Ukraine. Wednesday's information on easing tensions between Ukraine and Russia was interpreted differently by Moscow and Kiev, nevertheless, the long-awaited ceasefire was announced today. The zloty rose against all major pairs.

Another important issue for the zloty is the stance of the Monetary Policy Council. In the current circumstances of ultra-expansive monetary policy in the eurozone, the MPC may be willing to cut interest rates deeper than previously planned. The major arguments in favor of that solution are: weakness of the economy, possible appreciation of the zloty due to interest rates disparity and increase of risk-appetite after easing of the Ukrainian crisis. Thus, the MPC meeting in October is going to be very interesting.