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Afternoon analysis 17.12.2014

17 Dec 2014 17:09|Artur Wiszniewski

The rouble halt declines as finance ministry warned of interventions. Positive data from the UK without influence on the pound. The dollar up before the Fed. The zloty dropped for the second day in a row due to Russian crisis.

Inflation in the euro zone stood at 0.3 percent on a yearly basis – down from 0.4 percent in the previous month. The final estimate from Eurostat was in line with preliminary release. However, falling inflation is increasing the probability for introduction of the full quantitative easing in the monetary union. Thus, this factor is pushing the euro down. The core inflation growth stood at 0.7 percent – the same as in the previous month.

Greece may prove to be a heavy burden for the common currency. Today's Greek lawmakers are to elect president. If parliament fails to choose the head of state in three turns of voting, the government will be dismissed and there will be early election in January. This scenario may lead to win of Syriza party that promised to discard reforms and leave the euro zone. As a result, it would hit the euro.

However, the EUR/USD will be heavily influenced by the Federal Reserve that will announce decision on rates and Fed president Janet Yellen will attend the press conference.

The recent data from the US is very good – the labor market condition are improving and the latest reports from industry were very good. These are strong arguments for the hawkish part of the Fed to maintain current direction and increase rates in mid 2015.

Even so, the dovish part of the Fed is also equipped in good reasons to leave rates unchanged. The Russian currency crisis weights negatively on growth in Central Eastern Europe region, the Chinese economy is under-performing and the euro zone is still flagging. Moreover, today's data on inflation showed that the Fed price growth target is moving away. Inflation growth stood at 1.3 percent in November – down form 1.7 percent in the preceding month. These are solid arguments for leaving the “considerable time” phrase in statement, what will be negative for the dollar.

Given current circumstance, every scenario is possible. As a result, one can observe subdued volatility in the EUR/USD market.

The pound stabilizes

Today's data from the United Kingdom didn't affect the pound significantly. This week the British currency is rather stable against the euro and the dollar.

The labor market positively surprised. In the third quarter wage growth stood at 1.6 percent – more than 1.2 percent in the previous month. As a result, the price growth surpassed the inflation for the first time since 2009. This means that households real income in not deteriorated by inflation first time in six years. This is clearly positive for consumption.

Moreover, the labor market numbers showed a drop of unemployed by 63k to 1.93 million. The unemployment rate stood at 6 percent – the lowest level since 2008.

The British monetary authorities doesn't see a threat for price stability in growing wages as it is considered in line with productivity growth – according to the BOE minutes released today. The majority of policymakers stated that only a stronger price growth is needed to meet central bank's target. The BOE sees an inflation growth below 1 percent this month.

Similar as at the previous meeting, Martin Weale and Ian McCafferty voted for rates hikes, but their proposal was discarded by the majority.

Production slippage

The Russian finance ministry sold the dollar in the market to support the rouble. According to news from information agencies the government may sell up to 7 billion dollars of reserves. Today there were interventions conducted by the central bank and government. This factor stopped the rouble slide, however the currency is down by almost 50 percent this year.

Currency crisis in Russia is hurting market sentiment toward Central Eastern Europe region assets. As a result, the zloty dropped for a second day in a row. The USD/PLN moved above 3.40 and the EUR/PLN hit 4.23.

Industrial production in Poland was weak – it rose 0.3 percent, less than 1.1 percent expected. In the previous month production rose 1.6 percent. The construction production also disappointed – it fell 1.6 percent.

This factor – next to Russian crisis and still negative sentiment in the broad market – resulted in a weaker zloty. Until the market condition improves, the zloty will not return to gains.

17 Dec 2014 17:09|Artur Wiszniewski

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.

See also:

17 Dec 2014 12:53

Daily analysis 17.12.2014

16 Dec 2014 17:19

Afternoon analysis 16.12.2014

16 Dec 2014 12:49

Daily analysis 16.12.2014

16 Dec 2014 10:36

Special report: Panic in Russia

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