Afternoon analysis 22.01.2016

The outlook for more stimulus from the European Central Bank spurred optimism in the markets. Strong rebound of the oil price supported the commodity currencies. The zloty remained near low levels in spite of sentiment improvement.

Although the European Central Bank did not provide new actions, it was responsible for sentiment improvement in the broad market. On Thursday the Frankfurt­base institution left the monetary policy unchanged. The basis rate stood at 0.05 percent and the deposit rate was left at minus 0.30 percent. The ECB will continue to buy 60 billion euros in assets on a monthly basis. As usual, Mario Draghi's press conference was more important.

The ECB president said the monetary authorities are highly motivated to fulfill the inflation target. Mario Draghi said that there is no limit on tool that the ECB would use within its mandate. Moreover, he pointed at the ECB's March meeting as a probable moment for adjusting the monetary policy.

Given the latest data on inflation in the eurozone, it is very likely there will be more stimulus. A similar scenario has been supported by drop in oil price and the emerging market economies slowdown. Moreover, in spite of some improvement in the European labor markets, it is not very likely that consumption will be able to support inflation.

In addition, the report on sentiment in the European countries have shown some deterioration of the situation. In January the PMI indexes for Germany and France were weaker than in the prior month. The broad index for the monetary union was also weaker that expected. It dropped from 53.2 to 52.3. The forecast was for 53. The French economy was the largest disappointment. The PMI index dropped to 50 ­ the level that separates expansion from slowdown.

All in all, it is highly probable the next ECB meeting will result in additional stimulus. The key uncertain issue is which measure the ECB will use. The strongest tool would be an increase in the monthly amount of asset purchases.

The euro was very volatile after Draghi's speech. Later, the European currency dropped against the dollar. The move reflects the outlook for more stimulus. Moreover, the positive market sentiment affects negatively the euro as a financing currency in carry trade transactions.

Oil rebound

After Draghi's conference the oil price rebounded from the lowest level since 2003. The move has been continued on Friday. The oil price increased from around 28 dollars on Thursday to near 31.50 dollars today (about 6 percent on Friday).

The rebound was not stopped in spite of the US reports that showed increasing inventories. Given the situation, the move in oil market would have been speculative. In this context, the probability the move will be continued is not very likely.

Rising oil price helped the ruble. The Russian currency increased from the record low level. The USD/RUB exceeded 85.90 yesterday and today it dropped below 78.60. The market volatility is very high. Other commodity currencies also gained.

Zloty at low level

Development minister Mateusz Morawiecki sees not need to intervene in the currency market (according to the PAP agency). However, he wants to see the euro in 4.10­4.40 zlotys range. Moreover, Jerzy Osiatyński from the Monetary Policy Council said the next move of the monetary authorities would be rather to hike rates than lower (according to the PAP agency).

The comments from the Polish authorities coupled with sentiment improvement helped the zloty. However, the zloty's rebound was rather narrow. In the short term, the probability of a stronger zloty is rather limited.