Afternoon analysis 19.10.2015

The euro extended declines against the dollar and other major currencies. Mixed feelings after the Chinese data. The Polish reports missed the forecasts. The zloty hit by political risk and risk aversion.

The euro remained under pressure. The decline of the common currency has been sparked by the expectations that the European Central Bank is going to expand monetary stimulus. In the last few weeks, the ECB members have considered a similar scenario several times. ECB President Mario Draghi was among them. However, the ECB officials did not provide specific proposals or any time line.

In the last week, the euro declined after comments from the ECB's Ewald Nowotny. He said in Warsaw that the eurozone needs an expansive policy. A cautious scrutiny of his speech suggests, that he was referring to the fiscal policy not to the monetary policy that is in the scope of the ECB. The market reaction has shown that the monetary easing interpretation won.

Nevertheless, the newspapers Puls Biznesu and Rzeczpospolita published interviews with Ewald Nowotny after his speech. On this basis it is easy to see, that Nowotny had the fiscal policy in his mind during the remarks. In regard to the monetary policy, he said that it is too soon to act.

There is almost a year left of the current bond buying program. And more data is needed to better assess the long term tendencies in prices and the impact of commodities' slide. Nowotny said that the fiscal policy should add more to growth. It was restrictive after the crisis and currently it is neutral.

In spite of the new view on the matter, the euro remained under pressure. The ECB is scheduled to decide on rates this week. Investors believe that Mario Draghi will provide dovish signals. However, it is not very likely. Although the ECB is seeing some space for additional actions, it will not hurry. In the meantime, some commentators see a chance that the ECB will act before the end of the year.

Weak zloty

The Chinese reports were vague. The headline readings were slightly better than the forecasts (more on the issue in our previous commentary). And the GDP structure was quite good. The slowdown in industry was accompanied with an acceleration in services. A similar tendency is a result of the ongoing transition of the Chinese growth model.

However, investors were rather cautious. The German stock exchange (with the largest exposition to China) gave away its earlier gains. Other markets dropped. As a result, the market sentiment was rather negative. Especially, when the commodities also dropped.

Once again, the Polish data disappointed. Retail sales increased 0.1 percent on a yearly basis. A result below the plus 1.5 percent that was expected. In contrast, industrial production increased 4.1 percent against the 3.9 percent that was forecast. However, the latest data point at a slowdown in the Polish economy.

Given the situation, the zloty posted a broad decline against all its major pairs. Moreover, the currency was pressured by the heightened political risk before this week's general election. Although this factor will affect the zloty in the short term, the probability of a stronger zloty is currently limited.