Afternoon analysis 09.02.2016

Risk aversion returned after an unsuccessful rebound in the morning. Bundesbank President Jens Weidmann warned the inflation rate is going to increase later than it was expected. The zloty remained at a low level.

At the beginning of today's session there was some improvement in the market sentiment. However, in the second part of the day, risk aversion returned in the markets. The European markets dropped more than 2 percent. The US future has also declined. Their currency dropped more than 1 percent.

The German industry data sparked anxiety concerning the future of the European economy. After weaker than expected numbers on orders last Friday, today the report on production has missed the forecast. Moreover, yesterday's Sentix Index revealed rising problems of the German economy, which was considered the major growth engine of the eurozone.

Given the recent deterioration of the German data, the expectations before the March meeting of the European Central Bank are getting more important. ECB President Mario Draghi has been constantly iterating, and the monetary authorities are ready to act if needed. As the German economy growth falters, the probability of an inflation rebound is getting smaller.

The probability that the ECB will act is increased after remarks from Bundesbank President Jens Weidmann. He said that inflation is going to rebound later than it was previously expected. Although the overall economic situation has deteriorated, the German Central Bank chief said that the market’s reaction is exaggerated. Moreover, Weidmann sees no risk of rapid deterioration of the economic situation in China.

The relatively dovish remarks made by the Bundesbank chief, did not weaken the euro and did not improve the market sentiment. In contrast, yesterday, Benoit Coeure from the ECB warned that the monetary authorities will not act under the pressure of financial markets. Eventually, the EUR/USD moved nearly to 1.13 - the highest level since October 2015.

For the EUR/USD, the major factor will be tomorrow's testimony of Janet Yellen in the Congress. If the Fed president cites risk to the economic and inflation outlook, the dollar may extend its losses.

Zloty at low level

Additional factors are adding to risk aversion. Record low commodity prices put part of the mining sector in the face of bankruptcy. This factor also hurts the oil-exporting countries. The banking sector faces losses on financing the mining industry projects. The backdrop of this is the Chinese slowdown.

Given the situation, the risky assets are under pressure. As a result, the zloty resumed losses after some rebound against the euro and the Swiss franc. The Polish currency exploited the weakness of the dollar and the pound, but remained at the low level.

In the short term, probability of a stronger zloty is limited. The Polish currency will remain susceptible to risk aversion and will show a tendency to drop further. In the longer term, the more dovish than expected stance of the ECB and the Fed may support emerging market currencies.