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Afternoon analysis 07.10.2014

8 Oct 2014 11:03|Artur Wiszniewski

The euro bowed under pressure of poor economic data. Surprisingly weak data from Czech Republic and Hungary. World growth outlook cut by the IMF. Russia sell currencies to shore up the rouble.

Correction scenario has been hovering over the EUR/USD for s some time and it was eventually materialized. But after strong euro growth on Monday it drooped again on Tuesday afternoon. The euro bent under the pressure of poor data from Germany, that increased probability of negative GDP growth in the third quarter, what may result in recession in the major EU economy.

Poor Czech and Hungarian data

Not only the German reports were below expectations. Also, emerging economies like Czech Republic and Hungary showed some deterioration in economic activity. The Czech industrial production dropped 5.2 percent on a yearly basis, lower than 1 percent increase projected. It was explained by holiday period, what resulted in lowering production in chemical and motor facilities. In addition, trade balance fell to 21.3 billion crown against 28.3 billion expected. In Hungary industrial production dropped 5.7 percent.

IMF cuts forecast

The International Monetary Fund cut global growth outlook. World GDP is now expected to rise 3.8 percent, down from 4 percent in June forecast. In 2014 global GDP is expected to rise 3.3 percent.

The US economy is viewed as a bright spot by the IMF. The US GDP is expected to growth 2.2 percent this year and 3.1 percent in the next year. The forecast was revised up from 1.7 percent and 3 percent respectively. The IMF expects, that the Federal Reserve will rise rates in the middle of 2015.

The euro zone will remain weak, according to IMF outlook. Monetary union GDP will rise 1.3 percent in 2015 after 0.8 growth in this year. So, the forecast for the next year was cut from 1.5 percent. The IMF sees that the European Central Bank may be forced to introduce additional measures to ward off deflation and shore up growth. It means that it may introduce full quantitative easing – an asset purchase program what encompasses government bonds. China will slow further, Ukraine will face severe recession and the Russian GDP growth will be flat, according to the IMF.

Zloty slightly down

The Russian Central Bank conducted interventions in the currency market for the first time since the beginning of the Ukrainian crisis. The actions were aimed at strengthening the rubble. The central bank spent 1.7 billion dollars, according to Bloomberg. In spite of easing of the crisis the Russian currency remained under pressure. The Russian companies face 54.7 billion dollar debt redemption in the next three months, what spurs demand for foreign currencies. Since the end of 2013 the Russian foreign reserves have dropped about 11 percent.

After quite good Monday the zloty was little down on Tuesday against the euro and the dollar. The Polish currency waits for tomorrow's Monetary Policy Council meeting, what will result in cutting interest rates by 25 basis points. That will result in higher susceptibility of the Polish currency due to worsening of rates parity.

The labor ministry said that the unemployment rate in September fell to 11.5 percent from 11.7 percent in August. It also expects that unemployment will drop another 0.1 percentage point in October. This doesn't change the overall view on the MPC's plans and major trends in the Polish currency market.

8 Oct 2014 11:03|Artur Wiszniewski

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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