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Afternoon analysis 14.01.2016

14 Jan 2016 17:20|Marcin Lipka

The European Central Bank reluctant to increase stimulus. Risk aversion returned in the markets. Germany's economy had a good year. The zloty gave away its recent gains.

The German economic growth was the highest in the last four years. In 2015 the GDP growth at was 1.7 percent against 1.5 percent in the previous twelve months. The forecast was for a 1.6 percent growth.

Consumption was the major growth engine. The major factors that supported spending growth were rising wages and record high employment. The unemployment rate dropped to the lowest level since the early 90s. The consumption growth was also supported by low inflation, notably drop in the gasoline price.

Consumption increased by 1.9 percent from the previous year, which contributed 1 percent to the GDP growth. In contrast, international trade added 0.2 percent to GDP growth as the global economy slowed down. In spite of weaker expansion abroad, the export growth stood at 7.7 percent in the January-November period. Import increased 5.3 percent. Poland's export to Germany increased 10.9 percent in that period.

ECB reluctant to add more QE

On Wednesday the Reuters agency said the European Central Bank will not increase stimulus in spite of rising uncertainty. The information was based on interviews with five ECB members, conducted on condition of anonymity.

In early December the ECB meeting largely disappointed. Although the ECB cuts the interest rate and extended the quantitative easing, it did not increase the monthly amount of purchases. The measures did not please investors. The ECB said it may adjust its policy, however it will not rush. Today's minutes from the last ECB meeting confirmed the stance presented by Mario Draghi after rate decision.

Given today's publications, the probability of more stimulus in the eurozone after the ECB's March meeting is rather low. The Chinese turmoil and weak inflation data will not change the situation. Part of ECB members who talked with Reuters see a chance for more stimulus in more distant future. The next ECB meeting is scheduled on 21 January.

Deterioration of the market sentiment, rising tension in China and weak inflation data limit the probability of four interest rate hikes in the US. It may negatively affect the dollar. The situation combined with the ECB reluctance to add stimulus may result in the EUR/USD rising to 1.10.

Weak zloty

The Monetary Policy Council left the rates unchanged. The basis rate stood at 1.50 percent - the lowest level in history. In the next MPC meeting newly appointed members will be present. However, their latest statement were less dovish than it was expected. As a result, the probability of lower rates dropped.

Investors in the future markets expect interest rate cut. The cost of credit may drop 28 basis points over next three months and 37 basis points within six months. The discrepancy between the MPC and the market result in a stronger zloty in the longer term.

Currently, the zloty remained under influence of the global factors. Stronger risk aversions after disappointing sessions in the US and Europe resulted in a move to safe havens. As a result, the franc returned above 4 zlotys. The euro moved above 4.39 zlotys. It was the highest level since mid-2012. The probability of a stronger zloty is currently rather limited.

14 Jan 2016 17:20|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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