Afternoon analysis 22.09.2015

Growing divergence between the Federal Reserve and the European Central Bank shapes the market sentiment. The euro gained against the dollar. The Brazilian real dropped against the US currency on record. The zloty weakened due to rising risk aversion.

The latest comments from the European Central Bank and the Federal Reserve confirmed the general view that the monetary policy will be differencing. According to the market consensus, the Fed will increase rates in December. In contrast, the ECB is going to extend its bond buying program to mid 2017 (more on the latest comments from the major central banks in our previous commentary).

In the last week, the Fed left rates unchanged as expected. The US central bank cited the uncertainty concerning the global economy (especially the emerging markets and China) and the unpredictability of fulfilling its inflation goal.

However, the Fed members who were speaking after the FOMC meeting diluted the anxiety expressed in the central bank's statement. As a result, the dollar has been rising against the euro and other major currencies since then. The coming hike in the US is a factor, that will support the dollar in the longer term.

A deterioration of this move may happen, if the Chinese reports miss the forecasts. The Chinese PMI report is scheduled tomorrow. The gauge is expected at the 47.5 points level against 47.3 points in the preceding month. Every weaker result will hurt the dollar.

On Wednesday the European Central Bank President Mario Draghi is scheduled to speak. The Frankfurt-based institution chief is expected to address the speculations concerning an extension of the bond buying program. If the ECB president supports the scenario for more easing, the common currency will be additionally pressured.

Real hit the bottom

The Brazilian real hit the lowest level against the dollar in history. The USD/BRL hit the 4.05 level. It was the lowest level since the currency was introduced in 1994.

The currency dropped due to a severe crisis that hit the nation. S&P cut the Brazilian rating to the junk level on September 9. The corruption scandal weakened the position of President Dilma Rousseff, who is not capable of delivering expected spending cuts and tax increases. As a result, the credit grade may be cut further. Moreover, the economy is hurting due to the recession and high inflation.

Risk aversion

The zloty and other emerging market currencies dropped due to risk aversion. The Polish currency posted a broad decline against all its major pairs.

The zloty was performing more weakly than other currencies in the CEE region. The Czech krone and the Hungarian forint performed better. The weakness of the Polish currency may be a result of the deterioration of economic reports. Recently the reports on industrial production retail sales have missed forecasts. Coupled with political risk stemming from the coming general elections, the zloty is susceptible to risk aversion. As a result, the Polish currency will remain weak in the short term.