Afternoon analysis 15.01.2016

Risk aversion returner in the markets. The euro increased on sentiment deterioration and weak data from the US. The Monetary Policy Council sees risk in the public finance over the next years. The zloty dropped severely.

Sentiment in the markets was deteriorated as the US data missed the forecasts. Retail sales data was below the forecast. It dropped 0.1 percent on a monthly basis and the data excluding autos declined also 0.1 percent. The forecast was from flat and plus 0.2 percent, respectively.

The report on production sector in New York region missed the forecast. The New York Empire State index dropped to minus 19.4 against minus 6.2 in the prior month. Production also disappointed. It dropped 0.4 percent against the 0.2 percent increase.

The US labor market expansion is the strongest since the end of 90s. However, in spite of rising employment and drop of unemployment rate households are reluctant to spend money. Consumption has not supported the inflation rate.

Given the situation, today's numbers are negative for the dollar. As a result, the EUR/USD exceeded the 1.0960 level.

Zloty under pressure

The Monetary Policy Council sees some risk for the public finance developments. There is not threat for 2016. In this year the 2.8 percent GDP deficit level is feasible as the government will get extra money inflow (LTE auction). However, some difficulties may appear in the coming years. Deficit may exceed 3 percent GDP if the government fails to find new source of financing.

The probability of interest rate has fallen. Marek Chrzanowski, new Monetary Policy Member recently appointed by senate, said the MPC should be wary when considering interest rate cuts. It mean that he is reluctant to lower the cost of credit. Chrzanowski remarks were coherent with the statement made recently by other new MPC members.

The CSO released the report on inflation. In December the inflation rate was in line with the flash estimate. Deflation stood at 0.5 percent against 0.6 percent decline in prices in the previous month. The major factor responsible for deflation was a drop in gasoline price (minus 11.8 percent). In 2015 the inflation rater was minus 0.9 percent.

Before the flash data was released, the forecast was for minus 0.4 percent. As a result the December data was worse than the forecast. During the press conference after the rate decision NBP President Marek Belka said the inflation forecasts were too optimistic. Given the situation, deflation may recede later that previously thought. This factor will increase pressure on additional interest rate cuts if the price level does not rise.

After today's session the rating agencies will release rating reviews for Poland. The Reuters agency said on Thursday that some analysts expect Standard & Poor's agency may lower outlook for Poland's rating from positive to neutral. A similar move would increase pressure on the Polish financial market, especially the zloty.

The euro exceeded 4.42 zlotys. It was the highest level since mid 2012. In that time the eurozone public finance crisis was hurting the financial markets. The dollar moved above 4.05 zlotys and the franc above 4.04 zlotys.

The major factor responsible for a weak zloty is the negative sentiment in the broad market. Nervousness stemming from the Chinese turmoil has been replaced by the US data deterioration. The Polish currency was also pressured by the domestic factors. Given the situation, the probability of a stronger zloty is currently very low.