Afternoon analysis 22.10.2014

The dollar rose as US inflation numbers exceeded expectations. The euro fell after speculations that 11 banks from the euro area failed to pass stress-tests. The zloty dropped significantly against the dollar.

In September the inflation growth in the US stood at 1.7 percent on a yearly basis, up change from 1.6 percent in the previous month. It was above 1.6 percent expected by analysts surveyed by Bloomberg. Conversely, the so called core inflation growth (that excludes volatile prices of food and energy) was in line with projections and stood at 1.7 percent as in August.

Although today's data were close to the market consensus, it showed that inflation growth moved near to the Federal Reserve's goal of 2 percent. As a result, we observed strengthened of the dollar as inflation reading supported a hawkish part of the Fed.

Last week we observed discussion on media between members of the Fed on whether there is need of postponing a closing of quantitative easing and even introducing next round of asset purchases in the US. Inconsistent signals from the Fed had heightened volatility in the markets, what was strengthened as some good data from the US economy was shown that strengthened a case for closing QE.

The euro dropped after tests

On Sunday, 26. October the European Central Bank will reveal its asset review of 128 largest banks from the euro zone. Although the scrutiny was supposed to be pursuit with high level of confidentiality, today media unveiled information that 11 banks failed to pass the test. Among them there was 4 creditors from Greece, 3 from Italy, 2 from Austria and one from Belgium, Portugal and Cyprus. The number may be even higher – according to Philippe Bodereau from PIMCO as much as 18 banks could have failed the tests.

The ECB report was seen as a possible calming factor. But given the latest information there is rising concern that Sunday's report may provide additional uncertainty. So it may complicate Mario Draghi's plan to improve credit flow by restoring the confidence in the financial industry. In December the ECB will allot the second TLTRO. In September the tender was below expectation – banks made a bid only for 82.6 billion euro. Earlier it was expected, that December's tender will be more effective, but given poor performance of the banks it is now less possible.

The information on poor results of stress-tests pushed the euro lower. As a result, it extended yesterday's loses caused by the information that the ECB may introduce corporate bond purchases as a part of its assets purchases scheme. Although Luc Coene from the ECB denied that there is a similar plan, the euro fell for a second day. In the meantime, there was some information that the ECB is buying asset-backed securities from countries like Italy and Spain. It is also a negative factor for the euro. The ECB will revel the scale of purchases on Monday.

The zloty on tract

Some data will be published tomorrow, that may influence the Polish currency, if reports differ from expectation (a wider view in our yesterday's commentary). The zloty was not influenced due to collapse of the negotiations between Ukraine and Russia on resuming gas supplies (a broader view in our morning commentary).

The Polish currency dropped against its major counterparts, but its loses against the dollar were higher that those against the euro due to drop of the EUR/USD. We can expect that this tendency will hold in the near term.