Afternoon analysis 08.12.2014

The EUR/USD hit the lowest level since August 2012. The common currency was pushed down after poor data releases and mounting speculations for full QE. The labor market performance fueled the dollar. Heightened risk aversion resulted in zloty's weakening.

The recent data from Germany are somewhat confusing. Today's report on industrial production was worse than expected. In October the production growth stood at 0.2 percent on monthly basis, down from 1.1 percent in the preceding month (revised from 1.4 percent) and less than 0.4 percent expected by the analysts. However, report on industrial orders released on Friday was above expectations.

The rest of the key reports were also vague. The PMI reports from industrial and service sectors fell in November. Especially the industrial PMI was disturbing as the gauge dropped below 50 – the level that separates contraction from growth. Conversely, the Ifo report and ZEW index showed improvement of economic conditions.

Performance of Germany is important not only due the fact that it is the largest euro zone's economy, but also due to Bundesbank's defiance against the full quantitative easing. German central bank president Jens Weidmann is a major opponent of Mario Draghi's plan to pursue government bonds purchases to spur growth and ward off deflation risk. However, any deterioration of economic environment in Germany softens the Bundesbank.

After announcing interest rates decision, Mario Draghi said further actions may be taken after assessment of measures introduced earlier in the first quarter of 2015. This statement was seen as a way to meet Bundesbank expectations – the German central bank currently is unwilling to introduce QE but as growth deteriorates and there is no breakthrough in the euro zone, it might ease its stance.

On last Friday the Bundesbank cut its forecasts for GDP growth and inflation through 2016. Moreover, today the Bank of France kept its forecast for fourth quarter GDP growth at 0.1 percent. Stagnating economy of the second largest euro zone's economy is a negative factor for the common currency.

The dollar up due to labor market

The Sentix index – a gauge of investors' sentiment in the euro zone – rose more than expected. The index stood at minus 2.5, up from minus 11.9 in the previous month. Analysts expected minus 10.5.

Ewald Nowotny form the European Central Bank said that falling oil price will surely result in lower inflation growth in the euro zone. The policymaker said also that Draghi's remarks concerning assets classes considered to be used in the QE were not precise and he should point at government bonds.

After releases of today's data and comments from the central bank officials the EUR/USD hit 1.22464 – the lowest level since August 10. 2012.

The dollar is propelled by a strong labor market (a wider view in our recent commentaries). After releases of the recent report, the Federal Reserve will surely remain on track to increase interest rates in mid 2015. In turn, the ECB moves in opposite direction, what puts the dollar in a very good position to rise further.

The zloty went down

Today's comments from the Monetary Policy Council members were coherent with each members' view presented earlier. Thus, the overall view on the MPC plans was not altered.

The Polish labor ministry informed that the unemployment rate stood at 11.4 percent in November, up from 11.3 percent in the previous month. As a result, the 9-months long falling streak has been ended. However, the labor market condition in currently a way better that in corresponding period of 2013, when unemployment rate was 1.8 percentage point higher.

The zloty was influenced by factors from the broad market. Today's drop reflected risk aversions that was materialized in falling stock indices around the world. Moreover, the euro at low level is also negative for the Polish currency. However, as the MPC refrained from interest rates cut and solid economic performance put the zloty in a good position to extend gains in longer term.