Afternoon analysis 15.01.2015

The European Union tries to soften Greeks before elections. German GDP rose in the highest pace in three years. The major event was the SNB decision to drop EUR/CHF cap.

The German economy GDP growth was in line with expectations. In 2014 the economy rose 1.5 per cent, as projected by analysts. It was the highest pace in three years. Destatis – German statistical office – pointed at domestic consumption as a driver of growth, that helped to avoid negative influence of external factors. However, the headline reading masked the fact, 2014 was very uneven for the German economy.

The beginning of 2014 was very good, but later the major EU economy slowed down. The country was close to recession in the third quarter. In addition, the very beginning of 2015 is also quite poor as recent reports concerning industrial sector was below expectations. The German government forecast for 2015 is 1.3 GPD growth, so it expects slowdown.

Although there are few rifts on the economic landscape, the condition of public finance is very good. The country posted surplus in 2014 of 0.4 percent GPD – the third surplus in a row. The labor market is also very strong – unemployment rose to 42.7 million – eighth record year in a row.

The EU tries to bribe Greeks

The specter of Syriza win haunts the European politics. The general elections will hold within less than two weeks and currently the left wing party that promised to drop bailout conditions and leave reforms is leading in polls. A win of Syriza will be negative for the EU and may reignite the risk of euro zone dismantle.

Thus, there are mounting speculations that the EU may propose next write-down of Greece's debt. The debt to GDP ratio in currently about 180 percent – a level that is pushing down the economy that struggles with 25 percent unemployment. A some relief will be helpful in returning to growth.

There is no chance for any write-down – according to Olli Rehn, but the influential policymaker sees a possibility of longer repayment period. This will also ease debt burden and help to convince Greeks to support pro-European parties.

The EUR/USD hit 1.15793 – the lowest level since the November 2003. It was a result of the SNB decision to drop EUR/CHF floor (more on SNB decision in our special report).The worse than expected data on unemployment claims had a somewhat lower influence on the EUR/USD (it rose to 316k against 299k expected).

Volatility spike

The SNB decision is currently the major factor that fuels the volatility in the markets. The influence of this event was very broad – it affected not only the EUR/CHF but also the EUR/USD. It also hit currencies from our region – the Hungarian forint and the zloty.

The high volatility creates unfavorable environment for the Polish currency. As a result, the zloty will be more susceptible for every negative factors. Yesterday, the Monetary Policy Council provided some support for the domestic currency (by stating that the probability for rates cut is low and deflation has rather mild effect on the economy), but this factor is currently not valid. Thus, the zloty will be pressured in the near term.