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Afternoon analysis 21.10.2014

21 Oct 2014 17:08|Artur Wiszniewski

The European Central Bank considers whether to buy corporate bonds. The euro dropped significantly after the news was released. The zloty exploited an increase in risk appetite.

As soon as in December the European Central Bank may announce purchases of corporate bonds, according to Reuters citing undefined sources. That means the ECB will probably expand purchases of private assets (covered bonds and assets-backed securities) that has been just launched.

Additional measures, similarly as the rest of recently introduced tools, will be aimed at restoring credit flow to the real economy. According to the ECB data private credit in the euro zone fell 1.5 percent from a year before.

Mario Draghi outlined the plan to expand the ECB balance sheet to 2012 levels. It means that the central bank has to expand its assets holdings by about 1 trillion euro. But it is doubted that the central bank will fulfill its commitment as the market of eligible securities is too narrow and banks are not eager to make a bid for cheap loans from the central bank.

The ECB lingering has sparked speculations that the monetary authorities will be forced to use full-scale quantitative easing to boost its balance sheet to awaited levels and eventually restore the credit growth. This solution was somewhat cumbersome due to the defiance from the Bundesbank and its allies. The German opposition has sent the OTM program (although never used) to the European Court of Justice. Given these circumstances, a case for introducing full QE is little possible.

Conversely, the idea of corporate bond purchases may cause smaller resistance from the Bundesbank than QE. Recent data from Germany was poor and it has even started speculations that the major euro zone economy may slip in to recession in the third quarter. The could soften the stance of the German central bank and eventually pave the way for a wider scope of asset purchases.

The information that the ECB considers corporate bonds purchases sent the EUR/USD lower. It fell below 1.2730 from 1.2830 on the morning.

The zloty exploited risk appetite

The case for the ECB to introduce additional measures has heightened a risk appetite. As a result, the zloty rose against its major pairs despite the dollar. The next days will provide some information on the condition of the Polish economy. On Thursday we will get the newest data on unemployment rate (11.6 percent expected against 11.7 percent in the previous month) and retail sales (2.5 percent projected). In addition, the National Bank of Poland will release minutes from the Monetary Policy Council meeting in September. Current market consensus it the MPC to cut rates by 25 basis points in November. If the future data differs from expectations, the zloty may be more volatile.

Today the Polish currency exploited heightened risk appetite and rose against the euro and the frank, but it fell against the broadly strong dollar. Recent shifts in expectations for the central banks policies have resulted in increased volatility in the markets. Given this, the zloty will stabilize on low level with a tendency to decrease.

21 Oct 2014 17:08|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.

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