Afternoon analysis 23.10.2015

What does the market expect from December’s ECB meeting? How Draghi's decisions may affect the Swiss franc and the Fed's actions. The pressure on the zloty diminished after the ECB signaled additional stimulation. Election scenarios in Poland.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 15.45: Preliminary PMI reading from US manufacturing (survey: 52.7 points).

Draghi surprised again

The EUR/USD reaction shows how the market was surprised with the ECB statement and Draghi's comments. The most heavily traded pair lost around 250 pips in the last 24hrs and is quoted around the 1.1100 level currently.

Both the headline news and detailed comments show that the monetary policy is expected to be aggressively loosened. Mario Draghi was talking about a further deposit rate cut despite that it is already in negative territory. Moreover, some ECB members wanted to modify the QE at the current meeting. The overall central bank approach is not “wait and see” but “work and assess”. More details are expected in December, with new macroeconomic projections.

The ECB chief is clearly concerned by the condition of the eurozone economy and threats of lower than expected inflation, despite that the GDP growth performs in line with the market consensus. Mario Draghi, however, is only focused on the negative outcomes and ignores some solid readings on credit growth and leading indicators.

Investors are getting ready for the ECB to both cut the deposit rate and increase the QE operation by around 10-20 billion a month. It is also possible that the monetary easing may be extended beyond September 2016.

Some market participants expect even deeper monetary stimulation than the consensus assumes. Morgan Stanley claims that the ECB may start buying corporate debt or even stocks. On the other hand, Goldman Sachs notes that if the euro stabilizes or strengthens Draghi may be pushed to cut the deposit rate further to minus 0.5%.

The ECB meeting gives an impression that the central bank is eager to fuel inflation and stop the appreciation attempts of the currency or even push it lower. Even though it is a fairly distant perspective Draghi's policy could even push the EUR/USD to 1.00. This may even serve as a base case scenario when the Fed decides to increase the benchmark this year.

Other central banks after the ECB message

Further monetary easing from the ECB will be a real challenge for the SNB. The ECB initial QE operation pushed the Swiss MPC to quit the peg on EUR/CHF. In the recent hours, the euro-franc pair have remained fairly stable taking into account the slump on the euro. However, if Draghi keeps exceeding expectations on the monetary policy it may be enough for the SNB to lessen the will to weaken the CHF. If it brings more speculators on board, the EUR/CHF could be even pushed towards parity.

Regarding the Fed, the ECB action seems to be neutral. The FOMC participants are still expecting dollar appreciation, so this should not be a surprise. Additionally, easier monetary policy in the eurozone should improve the global sentiment and make the hike easier. This aspect should keep pressure on the EUR/USD.

The foreign market in a few sentences

Yesterday's surprisingly dovish message from the ECB should keep, at least a medium term pressure on the European currency and bring difficulties to generate any significant correction on the EUR/USD. In favourable conditions – an interest rate hike in the US and more easing from the ECB – the euro-dollar pair may touch 1.00 in the first half of the year.

The ECB helped the zloty

The ECB message helped the EUR/PLN to be pushed towards 4.25. Also, the appreciation appetite on the CHF/PLN was slowed, but one has to remember that the Swiss franc weakness towards the euro is threatened. If the SNB fails to intervene on the market at a sufficient amount there is a risk of significant franc appreciation. Other foreign currencies gained to the zloty. It is clearly seen when we compare the PLN to other EM currencies. The zloty remains in 23rd place, only after the Argentinian peso, which is not freely traded.

In the next several days the election effect should still be seen on the zloty. If the majority of seats are taken by Law&Justice, the zloty may even weaken by up to 5 zloty cents to the euro, but in our opinion it would be a short term move. A hypothetical coalition with one of the smaller parties can bring a smaller PLN depreciation, but according to the market view it would be better for the PLN if the Peasants' Party joins the government rather than the Kukiz movement. No coalition, lengthened talks, threats of another election, is a much less favourable scenario than a Law&Justice government. If the worse case scenario happens it may weaken the zloty significantly and push the EUR/PLN towards the 4.35-4.40 range in the following weeks.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD	1.1350-1.1450	1.1450-1.1550	1.1250-1.1350
Range EUR/PLN	4.2000-4.2400	4.2000-4.2400	4.2000-4.2400
Range USD/PLN	3.6900-3.7300	3.6600-3.7000	3.7300-3.7700
Range CHF/PLN	3.8800-3.9200	3.8800-3.9200	3.8800-3.9200

Anticipated GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD	1.5350-1.5450	1.5250-1.5350	1.5450-1.5550
Range GBP/PLN	5.7200-5.7600	5.7000-5.7400	5.7400-5.7800

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