Afternoon analysis 24.09.2015

The sequence of interest rate cuts. The euro increased before Janet Yellen's speech. The zloty dropped against the euro and the Swiss franc.

Today's speech from the Federal Reserve President Janet Yellen may deliver something new. After the Fed's decision on interest rates in mid September, the statement and the press conference cited the emerging markets turmoil as a risk to the outlook for the economic activity. However, the view that has been presented by important Fed members since the FOMC's meeting was quite different as they were not as concerned by the emerging markets situation.

Yellen has not spoken in public since the Fed meeting. All in all, concerns regarding the emerging markets influence would have been overestimated. As a result, the Fed Chair may try to soften the view on this issue. If this is the case, the probability of a December hike will increase. Thus, the dollar may gain.

Recent reports from the European countries have shown that the influence of the Chinese crisis is limited. Given the strong reaction of the financial markets, one can assess the PMI indexes as quite good. Moreover, today's Ifo index from Germany was positive. The gauge exceeded the forecast by increasing to 108.5 points.

Mixed reports from the US were less important for investors. The reading on durable goods was quite vague. Orders dropped 2 percent as expected, but the prior month report was revised up. In contrast, the data excluding transportation equipment were worse than expected (flat against the plus 0.2 percent forecast). The prior month data was revised up. The number of unemployment claims stood at 267k as expected.

Series of rate cuts

On Thursday there were several decisions on interest rate cuts. Ukraine cut rates by 5 percent to 22 percent. It was the second decision in a row. The central bank cited diminishing risk for the price stability and expects more cuts. However, the economic situation is very bad. The monetary authorities expect the GDP to decline 11.5 percent this year.

The credit cost was lowered in Norway. It dropped 25 basis points to 0.75 percent. The major cause cited by the central bank was the situation in the oil market, that hurts the economy. The credit cost may fall to 0.59 percent in the next year and may stay below 1 percent to the end of 2018. The krone dropped significantly as the decision was not expected.

The Czech central bank did not cut rates, but it said it will continue to intervene in the exchange market to keep the EUR/CZK above the 27 level. Taiwan also cut interest rates today.

The zloty dropped

Yesterday, the European Central Bank did not provide any dovish remarks. President Mario Draghi said more time is needed to assess whether additional action from the central bank will be required. As a result, the euro increased and the move continued today. Moreover, the Fed may restart its hawkish rhetoric. These factors will negatively affect risk assets. Moreover, the emerging market situation is very difficult. Brazil was hit by a crisis. It is reflected by the real declined. The USD/BRL hit 4.24 - the highest level in history.

As the euro increased, the EUR/PLN and the CHF/PLN gained. However, due to the dollar and the pound decline the zloty's basket is quite steady. All in all, the likelihood of a stronger zloty is low as the risk aversion prevails in the markets.