Afternoon analysis 10.10.2014

The dollar rose aftrer renewed concerns about the world economy pushing the investors to safe assets. The zloty under pressure. Yield on Polish bonds declined on record, what increased the odds for additional cuts by the MPC.

The volatility on the markets remained heightened. Significant moves were sparked by the announcement of the Federal Open Market Committee minutes published on Thursday. It showed that the FOMC members are focused on the strong dollar and problems of the world economy that may cause some problems for the US economy rather than on the scenario for the interest rates hikes.

As a result, the dollar was pushed lower. But it reversed after the labor market data was shown on Thursday, that reflected the momentum of US economy. But an increased volatility battered the markets.

World growth concerns

The market sentiment remained under pressure as incoming data showed that it is losing its steam. Although the US economy is in quite good shape (it was praised by the International Monetary Fund by rising the growth forecast), in other parts of the world the situation is worse.

Especially the euro zone performance is poor. Record high unemployment intertwined with increasing deflation risk and lackluster growth is showing the seriousness of the situation. Yesterday the ECB president Mario Draghi during discussion with Stanley Fisher from the Fed acknowledged that the European monetary authorities are ready to act. In addition, Draghi outlined poor landscape of the euro zone economy and urged the European policy makers to start reforms.

The emerging markets economies are in troubles too. Russia spent 1.5 billion dollars on intervention on 8. October. It was the highest amount since the period preceding the Crimea referendum.

Bonds suggest more cuts

The Polish bonds yields fell at lowest level in history. Yields on the bonds due in 2016 dropped to 1.8 percent and the yields on bonds due in 2025 went down to 2.74 percent, according to Bloomberg data.

The Monetary Policy Council unexpectedly cut the interest rates by 50 basis points on Wednesday. It was more that 25 basis points expected by the majority of analysts surveyed by Bloomberg (33 against 7). The NBP president Marek Belka didn't exclude additional cuts but he also stated that the MPC is willing to adjust its stance in short period. So it may suggest that the cut in October was on off event, and there will be no additional cuts.

However, the bond market trend show that some market participants believe, that the MPC may lower the rates on the next meeting. From the perspective of the zloty this factor provides some stability. But the Polish currency remained under the pressure of risk-aversion, what results in drops against its major pairs. But the zloty continued to move in narrow corridor.