Afternoon analysis 26.08.2014

The zloty remained stable since the beginning of the week. The Polish currency skilfully exploited positive factors and avoided negative ones.

Stable zloty

The main fundamental factor from perspective of the zloty are currently expectations concerning interest rates cut. Members of the Monetary Policy Council who commented on media in last few weeks have showed growing willingness to easy a monetary stance. The question now is about the moment of cuts – it could be rather October than September – and the total scale of lowering a cost of credit. If MPC shifts to more accommodative stance, it will be negative factor for the Polish zloty due to less supportive interest rates divergence.

Today's data supported the case for interest rates cut. Retail sales growth stood at 2.1 percent in July, up from 1.2 percent in the previous month. Although report was in line with expectations, the growth of retail sales is still not satisfactory. Moreover, the unemployment rates was higher than expected on 11.9 percent, whereas it was expected to fall to 11.8 percent. In the last month unemployment rate stood at 12 percent.

The second most important factor with negative influence on the zloty is the Ukrainian crisis. The Ukrainian President Petro Poroshenko and his Russian counterpart Vladimir Putin are may meet today in Minsk. Talks in the capitol city of the Belarus probably won't give any breakthrough, but perhaps they will provide some hope for easing tensions between two nations in the near future. If the second outcome occurs, it will support risk-taking on the markets and the Polish zloty may gain. Nevertheless, the outlook for meeting outcome is rather cloudy due to information about Russian tanks crossing the Ukrainian border.

On the other hand, the zloty gained support due to general increase of risk appetites on the markets after European Central Bank President promised additional support for economy and urged governments to shift form austerity to growth-supporting policy. Mario Draghi cited lowering inflation expectations as the threat for price developments later in this year. That is the reason for monetary authorities to employ “unconventional tools” to safeguard price stability.

The incoming quantitative easing in the Euro Zone is mitigating influence of the Federal Reserve that is going in the opposite direction. This factor was reflected in falling yields on the bond market – yields in the most of the countries – even highly indebted – fell to the lowest levels on record. The stock markets is also gaining support from ECB – S&P500 moved above 2.000 points firs time in the history.

The appetite for the Polish bonds was also elevated. Yields of 10-year bond fell to as low as 3.023 percent. Attractiveness of the Polish debt was also supported due to expectations for interest rates cuts. The firm demand for Poland's debt is strengthening the zloty.

The zloty rose against the dollar to less than 3.17 and gained against the Swiss franc to below 3.46. The Euro and the pound were little changed at 4.18 and 5.255, respectively.

Mixed data from the U.S.

Today's data from the United States were mixed. On the one hand, the growth of durable goods orders was very strong. Report showed 22.6 percent increase – more than 5.1 percent predicted. The data was influenced by exceptional increase of orders for planes, which was 318 percent. But on the other hand, report excluding orders for planes – orders for core durable goods – was worse than expected. Core orders fell 0.8 percent, while the increase of 0.5 percent was predicted.

Moreover, the data from housing market showed that property prices growth fell more than expected. S&P / Case-Shiller Home Price Index rose 8.1 percent, less than 8.2 expected and less than 9.4 percent in the previous month. Home prices are important indicator of economy's health because they measure wealth of households and property market is important channel of monetary policy transmission. In the context of the more restrictive stance of the Fed the hose prices developments will be more important.

All in all, the dollar was little changed after the data was released. The U.S. currency remained near to its highest level in 11 months. The latest shift in ECB's stance and still supportive data from the U.S. economy will be fuelling increase.