Afternoon analysis 12.10.2015

The market is muted after the most recent Fed comments. Chinese central bank on the most recent market turmoil and its policy. The zloty remains stable, close to the 4.22 level per euro.

China wants to return to market stability

In the afternoon more comments from Dennis Lockhart hit the wire. The Atlanta Fed president repeated his view presented on Friday claiming that the first interest rate increase is possible either in October or in December. However, he also added that until the years end there will be a lot of macro data, which suggested that October in this case is much less probable.

Because the most recent volatility created on the market was caused not only by the developed economies but also by the emerging markets it is worth noting a statement presented during the central bankers’ meeting organized by the IMF in Lima.

In the Peruvian capital city the People's Bank of China (PBOC) deputy governor explained what had pushed Beijing authorities to devalue the yuan in August. Yi Gang said that the main goal was to put more emphasis on the market forces creating the rate of the local currency.

The PBOC, however, clearly stressed that “persistent RMB depreciation would be inconsistent with China's economic fundamentals”. Yi Gang also noted that China still has high trade surplus which should support the currency.

The MPC member also tried to explain some recent capital outflow, which was visible in lower currency reserves. The PBOC sees that “companies reduced their foreign financing and repaid foreign debt”, domestic companies increased their hedging against the exchange risks, which translated into more demand and “outbound investment also expanded rapidly”.

From the Yi Gang statement we can also conclude that Beijing would like to prevent the turmoil in the future noting to keep both proper fiscal and monetary policy, solid macroeconomic readings and plans to proceed structural reforms.

There is a high probability that there will be no significant volatility on the RMB in the coming weeks. It also looks as if some market participants calling for USD/CNY rate to be around 7.00 are currently too bearish.

In the incoming hours, the zloty should remain quite stable around 4.22 per euro. The Chinese data which are set to be published during the night (more info in the morning analysis) should not markedly deviate the base case scenario.