Afternoon analysis 05.12.2014

The strength of the US labor market sent the dollar at new high against the yen. The zloty dropped for a second day against the euro, frank. Speculations for the full quantitative easing in the euro zone are back in the market.

Today's reports from the US labor market exceeded even the most optimistic expectations. Non-farm employment rose 321k – more than 230k expected by analysts. Upper bound of forecast range was 306k. Moreover, data from last tow months was revised up by 43k.

Employment in private sector rose 314k – more than 225k expected and up from 236k in the previous month (revision from 209k). The unemployment rate stood at 5.8 percent, no change from the preceding period and in line with expectations. The wage growth was also better than expected – it stood at 0.4 percent, more than 0.2 percent projected and up from 0.1 percent in the previous month.

The release gave strong arguments for the dollar to gain. The US currency increased against the euro (the EUR/USD fell to the lowest level since August 2012) and the yen (the USD/JPY is at its highest since Jul;y 2007). If USD/JPY exceeds 124, the Japanese currency will hit its lowest level since the turn of 2002-03.

Speculations for the QE

Thursday's meeting of the European Central Bank didn't result in any additional stimulus measures. Although the odds for introducing new tolls now were low, some investors expected that the ECB may add to stimulus. As a result, the EUR/USD posted significant gains after the ECB's decision and Mario Draghi's press conference.

However, today Bloomberg informed that according to unofficial sources in the ECB's Governing Council, the central bank may introduce full quantitative easing – that includes purchases of government bonds – as soon as at ECB January meeting. Thus, although just yesterday Mario Draghi cooled appetite for the QE, the central bank may add to stimulus sooner than later.

The play of Bundesbank

Today the Bundesbank lowered its GDP growth forecast from 2 percent to 1 percent in the next year. The projection was cut despite a quite good report on industrial orders, that rose 2.5 percent – more than 0.6 percent expected.

President Jens Weidmann in his recent speeches reiterated his negative view on the government bond purchases as a measure creating wrong incentives for public finance and potentially violating EU's law.

Nevertheless, the delay of the QE by Mario Draghi may be seen as a way to mitigate Bundesbank's defiance. The German central bank that expects lower GDP growth may be more eager to introduce QE after profoundly assessing the impact of measures used earlier by the ECB (record low interest rates, private assets purchases and TLTRO).

Given available data, one can assess that there will be no breakthrough in the first quarter of 2015 in the euro zone. That pave the way for the QE – in line with recent speculations.

To sum up, full QE in the euro zone is closer than one could think based on Thursday's Draghi press conference. Conversely, the US labor market data gave the dollar significant spur to continue growth.

The zloty dropped for the second day

Heightened volatility in the EUR/USD market negatively affected the zloty, that posted losses against the euro and frank for the second day. The Polish currency was also lower against the dollar. However, the development in the Polish zloty market should be seen as a correction of recent gains. Ending of the easing cycle by the Monetary Policy Council and favorable market conditions create environment for the zloty's appreciation, the will be probably continued in the near future.