Afternoon analysis 12.12.2014

The dollar dropped as PPI inflation fell. Poor data from the euro zone didn't stop euro gains. The zloty strengthened in the second part of the session.

Data from the euro zone support the case for full quantitative easing. After disappointment from the TLTRO tender (banks made a bid only for 130 billion euro – less than 150 billion expected) and due to persistent weakness of the economy, the European Central Bank is consistently moving toward full quantitative easing – the program of asset purchases that encompasses government bonds.

Today's data on industrial production reaffirmed investors on poor performance of the euro zone economy. Production increased 0.1 percent – less than 0.2 percent expected by analysts. The report showed similar tendencies as earlier PMI reports that pointed at ongoing stagnation in the monetary union.

Mario Draghi said that the European Central Bank will decide whether to use additional stimulus (implied full quantitative easing) in the first quarter of 2015 after assessing the impact of measures introduced earlier. ECB president's statement shifts the interest to key reports concerning inflation and credit demand. However, as the odds for breakthrough in these fields is very low, it is becoming more clear that the question “whether to use” QE is obsolete in the appropriate question is “when”.

Other Eurostat data showed that employment rose 0.2 percent in the third quarter of 2014 – in line with expectations. In the preceding period it rose 0.3 percent (revised from 0.2 percent). Although the employment growth was continued for four quarters, it didn't result in a significant drop of unemployment rate that is currently near its record high.

The EUR/USD up

Poor data from the euro zone increased the likelihood for full QE, but it didn't result in falling euro as the US data was negative for the dollar.

Today's report on PPI inflation was below expectations – it fell 0.2 percent versus expected increase of 0.1 percent. In the previous month the producer's prices rose 0.3 percent. Moreover, core PPI inflation was not changed from the previous month after 0.4 percent increase in the previous month.

The US economy is looking very good, however, the Federal Reserve is watching not only labor market, but also price developments. The recent reports concerning inflation created notion, that it may keep differing from Fed's goal. Thus, if this situation preserves, it may affect outlook for the interest rates. It is due to sharp drop of oil prices, that resulted in low gasoline price.

However, the base scenario for the US interest rates is still not mutated, recent data is somewhat dovish for the dollar and slightly hawkish for the euro (due to deferred QE). As a result, we observe the increase of the EUR/USD. Nevertheless, this move will be rather briefly.

Oil affected rouble

The International Energy Agency lowered its forecast for oil demand growth in 2015. The forecast was cut for the fourth time in the last five months. Next year the daily demand will increase by 230k barrels – less than predicted earlier. Yesterday there was information that output in the US rose to 9.12 million daily in the highest pace in the history.

Today's IEA report was another factor that pushed oil prices lower, what affected currencies highly correlated with oil price. The Norwegian krone dropped to its lowest level in 11 years. However, the attention shifts again to the Russian rouble as the Bank of Russia intervened in the market to shore up the currency by selling 600 million dollar. However, it didn't tame rouble's slide.

The zloty little changed

The National Bank of Poland said, that broadest money aggregate rose 8.4 percent on a yearly basis. It is a result of record low interest rates that helped to lift credit for private sector. Especially one can observe rising credit for companies.

The zloty posted poor performance in the end of the week. It lost against the euro and was stable to the dollar. The outlook for zloty's gains deferred. However, due to low likelihood for the interest rates cuts and solid economy performance, the zloty may gain in the longer term as market conditions improves.