Afternoon analysis 24.09.2014

The euro at new lows as the US data beats estimates. Poor economic data from Germany may soften the Bundesbank. The ECB President reaffirmed its commitment to achieve inflation goal. The zloty rose against the euro and fell against the dollar.

Today's data showed weakness of the German economy. After the drop of investors' expectations index ZEW market participants were disappointed by the drop of business confidence gauge. The Ifo index fell to 104.7 from 106.3 in the previous month. It was the lowest level since April 2013. In addition, yesterday's PMI was lower than expected. Moreover, the German GDP in the second quarter of 2014 contracted 0.2 percent quarter on quarter after growing 0.7 percent in the first quarter.

The German economic weakness may be helpful for the European Central Bank due to the chance for softening the Bundesbank stance – the major opponent of Mario Draghi's accommodative monetary policy.

Since June the ECB introduced unprecedented measures in monetary policy. It cut refinancing rate at record low and used negative deposit rate. Moreover, the ECB allotted TLTRO in September and starts asset purchases in October.

Theses actions have been criticized by the Bundesbank from the early beginning. Eventually the German central bank didn't support September ECB actions. But in the face of deterioration of the German economy the Bundesbank President Jens Weidmann may soften his view on ECB's policy. As a result, it may pave the way towards full blown quantitative easing that includes purchases of government bonds.

New home sales beat estimates. Today's report showed increase of sales to 504,000 from 427,000 in the previous month. It was above 430,000 predicted in Bloomberg survey. The upper band of the forecast was only 465,000. Housing market performance strengthened the case for the Federal Reserve to rise interest rates in the beginning of 2015.

Mario Draghi pushed the euro lower by saying the monetary policy will stay accommodative for “a long time” and the ECB will use “available instrument” to fulfill its goal of bringing the inflation close but below 2 percent. In addition, the ECB President said that there is no possibility of breaking the euro.

The euro fell as the German data strengthened the case for full QE in the euro zone and the US data showed strong performance of housing market. The EUR/USD fell at its lowest this year below 1.28.

The zloty rose against the euro

Risk appetite determines the zloty developments. Demand for high yielding assets was strengthened due to easing of the Ukrainian crisis. Today the NATO spokesman informed that the Russian troops are leaving Ukraine. Although some of them remained in the Ukrainian soil and near to the border, these movements prove deescalation of the crisis. In addition, the bombing in Syria launched by the United States was broadly accepted by the international community. As a result, this factor didn't provoke additional risk-aversion.

Poor performance of the common currency was exploited by the zloty, although the Polish currency fell against the dollar. This tendency will probably remain valid in the near future until the Monetary Policy Council decides on rates in October (a broader view in our morning commentary).