Afternoon analysis 20.10.2014

Investors are awaiting new market movers as Monday's macro calendar is empty. The zloty was stable against the dollar and fell against the euro. The ECB to release crucial report on banking system on next Sunday.

The European Central Bank is scheduled to publish its scrutiny of the bank's balance sheets on Sunday October 26. The ECB examined about 130 largest creditors of the euro zone whether if they could handle distressed economic conditions or not. The survey is perceived as a major step toward restoring confidence in the European financial industry.

One of the most important obstacles on the road toward restoring growth in the monetary union is the shrinking private credit. The credit for companies and households dropped 1.5 percent on a yearly basis in August, according to the ECB data.

Is September the ECB allotted 82.6 billion euro of four year cheap loans charged 0.15 percent. It was less than 150 billion euro expected. Some commentators noticed that bank may be willing to wait for results of the ECB examination before making larger bid.

In addition, the ECB report will unveil capital needs of banking sector. The estimated capital shortfall varies from zero to 767 billion euro, according to Bloomberg. If the estimated amount is quite low, it may signal that the credit capacities are higher than previously was thought. As a result, the TLTRO tender in December may be more effective that this in September. That would be a positive impulse for the monetary union and the common currency, what would lead to extension of the euro's growth started two weeks ago.

Moreover, it will increase the odds for fulfilling Mario Draghi's commitment to extend the ECB balance sheet by one trillion euro to 2012 levels, if the next TLTRO is more effective. Eventually, the need for full quantitative easing, that encompasses a government bond, will be less urgent. That will also push the euro higher.

The zloty stable against the dollar

After significant moves in the previous week Monday's session is quite calm. That was reflected by the USD/PLN, what was little changed above 3.30. The zloty dropped against the euro – the EUR/PLN rose above 4.227 – near the highest level since the end of August.

The geopolitical risk remained heightened, although Russia and Ukraine moved closer to final agreement on restarting gas supplies. The contract is going to be signed during tomorrow's meeting in Brussels. But in the meantime, information agencies say about possible military incident on the Swedish coast. Allegedly the Russian submarine violated Swedish territorial waters, what caused the biggest military mobilization in Sweden since the end of cold war.

Moscow is under pressure from rating agencies. Moody's Investor's Service cut Russia creditworthiness to only one level above non-investment grade. Rating company cited deterioration of economic conditions due the sanctions impact and drop in currency reserves. But for Moscow more important is Standard & Poor's that already has set Russia rating one step above non-invest level. The assessment of the rating by S&P may result in cutting the grade to so called junk level.

The Russian central bank spent 13 billion dollars to stop the rouble slide, but that didn't result in stopping the decrease. The rouble is 13 percent lower against the dollar in the last three months and 19 percent since the beginning of the year.

The zloty will probably stabilize at low levels against its major pairs. In the next few hours the data coming form China may improve the sentiment for emerging market currencies, if the reports will show improvement of economic conditions (the GDP 7.2 percent growth is expected). So the Chinese reports may result in rising zloty, but only for a brief moment.