Afternoon analysis 21.11.2014

Market volatility exploded as Mario Draghi put the QE on the table and the PBOC cut the interest rates for the firs time since 2012. The zloty exploited weakness of the euro and dropped against the strong dollar.

The last day of the week was a very interesting one. The European Central Bank president's speech on the morning battered the euro as Mario Draghi for the second time since Monday reassured investors that the full quantitative easing in the game (a broader view on this matter in our morning commentary).

As a result the EUR/USD dropped near 1.24. Today, we have only a question “when” and the question “if” is outdated. Thus, if data from the euro zone still disappoints, the European Central Bank will introduce the full QE, that encompasses government bonds purchases.

China cut rates

After Mario Draghi – the greatest opponent of his policy – Bundesbank's president Jens Weidmann was scheduled to speak. Weidmann's speeches are often hawkish and they can support the euro, but today that was not a case as the People's Bank of China informed on interest rates cut just a moment after he started to speak. The Chinese authorities moved to easing as the economy is faltering and the banking sector faces increasing concerns after bursting of the housing bubble. The Chinese financial watchdog informed earlier that the bad loans increased by the most since 2005 in the third quarter, what reflected the tensions in the financial system.

The perspective of China increasing a monetary stimulus was taken as a positive factor (similarly as Japan's efforts), but not as a proof that the world's second biggest economy may face additional problems. Moreover, Draghi's remarks on the QE increased risk appetite in the markets. As a result, we observed gaining stock indices and increasing emerging countries' currencies.

This factor helped to lift the rouble that tried to exploit rising oil price (as a result of speculation that the OPEC countries will decrease supply). The Russian currency rose 1.3 percent and it will probably post a first week up since 11 weeks.

The zloty rose against the euro and dropped to the dollar

Rising risk appetites pushed the zloty higher against the euro and the frank. The EUR/PLN dropped below 4.20 for the firs time since October 14 and the CHF/PLN fell below 3.50. The zloty didn't manage to rise against the dollar – the USD/PLN rose near 3.38.

The zloty posted gains in spite of commentaries from the Monetary Policy Council's members and the NBP president Marek Belka that there is a room for additional interest rates cut. Currently, the support for a lower rates among policymakers is too low to change the outlook for interest rates and the probability of additional cuts was depreciated.

Mario Draghi's determination to spur inflation, although it was not forged into virtual moves, it pushed the euro lower. In the meantime, the Federal Reserve moves in the opposite direction to rise interest rates in the middle of 2015. Given that, the zloty will probably extend losses against the dollar and move up versus the euro.