Afternoon analysis 26.09.2014

The euro hit new lows after the US GDP. USD/PLN at new highs. The Russian economy may keep on slowing despite deescalation of the Ukrainian crisis.

Economists at Societe Generale warned that weakening the euro may have limited impact on performance of the euro zone economy, according to Bloomberg. Improving the price competitiveness probably won't increase demand for exports due to the fact that the European trade competes by quality rather than price. It is not certain whether wages will rise along with inflation. Conversely, higher import prices may provoke drop of purchasing power, what will eventually result in lower consumer demand.

In addition, Societe Generale said that the impact of weak euro is different from it was in the past due to the curtailing of the importance of the United States and Europe in favor of the Asian countries. The Federal Reserve and the Bank of England will rise interest rates sooner than the European Central Bank, what means that the dollar and the pound are poised to rise against the common currency. In turn, the People's Bank of China and the Bank of Japan move in opposite direction. So the drop of the euro against the yuan and the yen is going to be limited. As a result, overall growth of the exports will be smaller than resulting from historical patterns.

Subdued credit

Despite the effort of the European Central Bank the credit growth in the euro area is negative. The record low interest rates didn't provide relief – in August private sector credit fell 1.5 percent on a yearly basis after falling 1.6 percent in the previous month. Later in September the ECB allotted 82.6 billion euros in four year cheap loans aimed at bolstering credit to the real economy and cut rates again at new lows.

Nevertheless, currently the credit action is subdued more due to persistent risk aversion – among banks and entrepreneurs – than liquidity constrains. This can be mitigated by launching asset-backed securities purchases by the ECB in October, which may help banks to overhaul their balance sheets by improving capital adequacy ratios. As a result, creditors will be less risk-averse. In Spain the risk aversion is viewed as one of the most important obstacles for reviving the credit and bolstering the economy.

The US annualised GDP growth stood at 4.6 percent. It was in line with expectations. The dollar rose after the data was shown. The EUR/USD fell to its lowest since November 2012. In addition, the US currency moved near its highest since 2008 against the yen.

Russia heads to recession

The Ukrainian President Petro Poroshenko said that the worst part of the crisis is over. Now Kiev may focus on restoring the economy and pursuing its goal to access the European Union and NATO. The Prime Minister Arseniy Yatsenyuk urged western countries to keep sanctions until country regains control over territories seized by Russia.

Given the current circumstances, Moscow will have to cope with sanctions for longer time. Moreover, the economists surveyed by Bloomberg predict, that the country will have to respond to low oil prices that hinder its budged. According to Kremlin, the price of Urals benchmark oil was below 100 dollars in August for the first time since 2012. The economists asked by Bloomberg said that country needs the price to be above 100 dollars to stave off recession risk and financial tensions.

Budget of Moscow is more oil dependent than it was in the past. In 2013 no-oil deficit was 10.3 percent GPD, the highest since 2010. Median forecast for the GDP growth in 2014 was lowered to 1 percent from 1.3 percent in the previous month, according to Bloomberg. Moreover, the Kremlin plans to retaliate to western sanctions by allowing to seize foreigners' asset in Russia. In addition, Moscow is going to compensate loses to major businessmen incurred due to sanctions. That signals the Kremlin doesn't plan to give up.

The dollar strengthened

The USD/PLN rose above 3.29 – the highest level since July 2013. Similarly, the GBP/PLN went up above 5.35 – the highest since July 2012. The Polish currency is stable against the euro and the frank.

The zloty developments are determined by the strength of the dollar and expectations for the Monetary Policy Council to cut interest rates. In the next week, the PMI will be shown before the MPC decides on interest rates on 8 October. The monetary authorities will cut the cost of credit by 25 basis point and signal more cuts in the near future.

Easing of the Ukrainian crisis may remove risk aversion of the zloty despite unpredictability of the Kremlin. The extended rise of the dollar may trigger some profit taking. Given these circumstances, the zloty may rise before the end of the month as investors decide to cash gains. Nevertheless, in the longer term the zloty will drop against the dollar and the pound and remain stable against the euro and the pound.