Afternoon analysis 26.11.2015

The euro steady due to lack of new drivers. The European credit accelerates. The zloty still declines.

The absence of the US investors was responsible for low volatility in the markets (due to Thanksgiving day). In the longer term the major factors that will determine the market movements are the expectations before the European Central Bank and the Federal Reserve policy decisions. Today there were no new information concerning these issues.

However, the ECB will decide on rates in the next week, thus the market focus shifts to Frankfurt. On Wednesday the impulse which increased volatility was the unofficial news from Reuters that the ECB considers purchases of low quality assets and differentiation of negative deposit rates to spur inflation.

As a result, the euro dropped against the dollar and other major pairs. The EUR/USD dropped to 1.0560. On Thursday the major currency pair rebounded slightly, but it remained little above the 1.06 level, the lowest since April.

Credit accelerates

The ECB released today the report on money supply in October. It showed that the broadest money aggregate M3 increased 5.3 percent on a yearly basis.

However, the most important figure was the data on private sector credit. It increased 0.8 percent against 0.4 percent in the prior month. Credit for households increased 1.2 percent against 1.1 percent in the prior month. And credit for non-financial sector increased 0.6 percent against 0.1 percent in the preceding period.

The breakthrough in the private credit growth happened in the end of 2014. After more than two years of declines private sector has started to borrow again as the ECB provided the lowest interest rates in history. Although the tendency in the credit growth looks sustained, it has not resulted in higher inflation. Recently the price growth has been near the zero level against the ECB's target near 2 percent.

As a result, today's data were neutral to the expectations before the ECB's meeting. However, the report showed a positive tendency, that increases the probability of a stronger economic rebound in the longer term.

Weak zloty

Minister of Development Mateusz Morawiecki said in an interview with the PAP agency that the government expects budget deficit near the 3 percent GDP level in the medium term. He said it is not important whether deficit is at 2.8 or 3.2 percent. The major issue is whether it works against cycle fluctuations. Morawiecki said that social spending planned by the government will be financed by sector taxes and improvement of tax system efficiency.

Regarding to monetary policy Mateusz Morawiecki said that the NBP's target is 2.5 percent inflation and currently we face deflation. Given the situation, he said that interest rates cut would not negatively affect the economy. The comments did not influence the zloty.

On Thursday the Polish currency decline further. The zloty dropped against all its major pairs. The dollar and the pound remained near their 11 and 10 years highs, respectively. The probability of a stronger zloty is currently limited.