Afternoon analysis 23.10.2015

Improvement in the economic situation did not support the euro. The People's Bank of China cuts the interest rates. Unexpected drop in the unemployment rate did not help the zloty.

In October the economic situation improved in the eurozone. Especially indexes showed better results in services. In the case of industry we can say about stabilization. After streak of poor reports the German industry posted next weak month (the PMI index missed the forecast).

Moreover, a disappointment was that companies cut prices for next month. It is a severe problem for the European Central Bank, which is not able to meet its two percent inflation goal. In the meantime, inflation in September has returned to the negative level.

As a result, although the readings were quite good, the euro did not stop its decline. On Thursday ECB President Mario Draghi said that the monetary authorities will re-examine the current policy in the context of new forecasts. It was clearly an announcement of additional monetary stimulation before the end of the year.

In contrast, the dollar increased on the solid labor market data. Given the situation, the EUR/USD dropped below 1.1050. It was the lowest level since 19 August.

China cuts interest rates

The People's Bank of China cut the interest rates. Lending rate dropped to 4.35 percent from 4.6 percent. Required reserve rate was cut 50 basis points. It has been the sixth cut since the end of 2014.

The decision was aimed to meet the growth goal of 7 percent GDP in 2015. The economy expanded at 6.9 percent pace in the third quarter. A result above the 6.8 percent that was forecast. Moreover, the reading showed that the major growth engines shifted from industry to consumption - a tendency desired by the government.

The PBOC's decision was positively welcomed by the stock markets. The European markets (especially in Germany) and in the US extended gains. This factor has cemented optimism sparked by the ECB.

Unemployment rate surprised

The CSO showed very good data on unemployment rate. It dropped to 9.7 percent. It exceeded the expectations. Last time the unemployment rate was as low was in December 2008. Nevertheless, in the last few weeks only reports on the labor market may be considered as positive. Other reading show that we observe clear deterioration of the situation. The biggest disappointment was retail sales.

However, improvement in the labor market did not help the zloty. The Polish currency dropped due to political risk. Additional pressure is coming from the expectations that the Federal Reserve will raise the interest rates this year. Whereas the zloty did not exploit the impact of the ECB actions and the interest rate cut in China.

The best possible solution for the zloty is a quick formation of government. It will help to easy the political risk and may help the zloty to rebound 1-1.5 percent. However, if the process is not fast and efficient, it will negatively weight on the Polish currency.