Afternoon analysis 19.12.2014

The European Central Bank seeks to soften Bundesbank stance on QE. The euro hit two year low. The zloty under pressure from poor data and renewed expectations for the interest rates cut.

Bundesbank is the major opponent of Mario Draghi's plan to introduce the full quantitative easing – asset purchasing program that encompasses government bonds. The European Central Bank currently seeks to soften Germany's stance on the QE. A solution may come from the proposal to share the risk stemming from the bond purchases not equally, but with respect to risk associated with particular country.

If this proposal is accepted, the euro zone central bank from countries that crisis influenced by the most, will have to create provisions for risk associated with bond purchases. It that way, any possible losses from public debt holdings, virtually would be borne by issuers central bank.

Currently there is no doubt that the ECB will introduce the QE in 2015. However, there is no certainty, when the purchases will occur. Consensus is that the ECB will announce purchases at its January meeting, but this does not mean that it will start buying immediately. Moreover, the rules for purchases are still unknown. Today Benoit Coeure from the ECB said that purchases of government bonds are most likely, but one can't exclude other asset classes.

Information form Reuters show that the ECB is trying to convince the Bundesbank for the cost of discontent of the other countries. It is certain, that shifting the majority of risk to weaker economies won't spark enthusiasm among South countries. As a result, any positive impact from the QE may be consumed by the additional spending for provisions.

Today the EUR/USD almost touched its 8. December minimum – the lowest level since August 2012, but it rose before breaching it. Test of this level will be certain in the next week, as the ECB is moving closer to QE and the Federal Reserve maintain its plan to rise rates in 2015.

Risk aversion tamed

First part of the week was nervous as the Russian crisis arouse and the reports from China showed deterioration of growth in the second largest world economy. Still, it the second part of the week market sentiment improved and stock returned to growth. This move was continued on Friday.

The pound didn't exploit opportunity to exceed gains. The British currency got a support from solid data – the wage growth and retail sales beat expectations. Friday's morning also gave some good information – government net borrowing fell by 1.6 billion pound to 14.1 billion – less than 15.1 billion expected. This report showed improvement of public finance as the economy is performing well.

However, the sterling posted losses against the dollar and it was little changed against the euro. The GBP/PLN – after significant gains this week – only rose slightly.

The zloty under pressure

The zloty was hit by a huge sell-off this week. It exceeded losses on Friday in spite of improved market sentiment and the stable rouble in the second part of the week.

The Polish currency plunge was spurred by the Russian currency crisis. But the negative sentiment is still apparent as yesterday the protocol from Monetary Policy Meeting in November showed that a 50 basis points cut was near to be accepted – it lacked only a one vote. What is more, the recent data from Polish economy showed some deterioration of economic conditions.

As a result, the zloty hit its lowest levels this year. The euro rose to 4.2834 – the lowest since September 2013. And the dollar hit 3.49 – the highest level since July 2012. The next week should bring some relief for the Polish currency, but poor reports and resurgent expectations for interest rates cuts take away some appreciation potential from the zloty.