Afternoon analysis 19.11.2014

Almost no demand for a Russian debt. After release of BoE's minutes the pound gained as inflation risk rose. A slippage of the US housing market.

The pound posted gains as the Bank of England's minutes pointed at inflation as a possible risk for the economy. As in October there was two votes in favor of risk increase against seven for maintaining current policy.

The major threats for the UK economy are poor performing euro zone and cooling UK housing market. However, the entrepreneurs' investment gained a momentum what may lead to wage increase. That may lead to increase of the inflation as productivity is subdued and the underutilization of spare capacity is vanishing.

Nevertheless, the view reflected by today's minutes doesn't match the latest report on inflation from the BoE. In the recent week the BOE said that the inflation won't return to target within three year and there is risk of price growth below 1 percent in future six months.

To reminiscent, yesterday's data on inflation showed the growth of 1.3 percent on a yearly basis, up from 1.2 percent in the previous month. Thus, the inflation goes up not down, what shifts expected interest rate increase to a more near term.

Eventually, the pound was strengthened against the dollar and the euro. It returned from its lowest level since September 2013 against the US currency and since October against the shared currency. The sterling stopped a six day losing streak.

The US slippage

The data from the US housing market missed estimates. Housing starts was down to 1.009 million from 1.038 million – below 1.025 expected. Conversely, the building permits report was up and above expectations. It rose to 1.080 million from 1.031 million against 1.040 million anticipated. It was the highest result in six years.

Although in general the data was quite positive, the dollar dropped against the euro after the release, but later the US currency recouped some losses. The key report today is the minutes from the Federal Open Market Committee. This factor will determine the developments of the EUR/USD (a wider view in our morning commentary).

No one wants a Russian debt

The sanctions imposed on Russia and plunge of the rubble were effective in disaffecting investors toward bonds issued by Moscow in domestic currency. As a result, the finance ministry sold only less than 10 percent of the goal amount or 10 million dollar. The average yield was 10.6 percent. It was the first auction in six weeks.

The weakness of the rouble fueled inflation that hit 8 percent on a yearly basis – the highest level in three years. One can expect that this tendency will gain momentum as the odds for peace agreement over Ukraine are very low. Thus, the belligerent rhetoric only defers a peace deal.

The zloty willing to gain

The gains of the euro were exploited by the zloty. The USD/PLN fell briefly below 3.36 and the EUR/PLN and CHF/PLN posted some losses.

Nevertheless, development of the situation on the zloty is determined by the EUR/USD moves. Given the forthcoming FOMC minutes and tomorrow's data on the PMI in the euro zone, the volatility may increase what will result in the drop of the Polish currency. However, in the longer term the zloty may gain as the MPC probably resign from interest rates cut.