Afternoon analysis 28.10.2014

The dollar swings after economic data as FOMC's decision emerges. France agreed to narrow its budged deficit. The zloty was higher, as probability for additional rate cuts falters.

The latest data from the US economy was mixed. Today's report on durable goods orders showed that orders dropped 1.3 percent on a monthly basis, a worse reading than plus 0.5 percent expected. The core durable goods orders fell 0.2 percent, also lower than plus 0.5 percent projected. Moreover, the S&P/Case-Shiller home price index showed a drop of prices on a monthly basis.

Conversely, the reports on consumer confidence and manufacturing in Richmond region were clearly above expectations. The Conference Board gauge rose surpassed expectations and stood at the highest level since 2007.

An unclear data came before tomorrow's crucial decisions of the Federal Open Market Committee on interest rates. There is some uncertainty about the Federal Reserve on whether it will eventually close its asset purchasing program, but a bigger concern is whether the Fed maintains its commitment to leave interest rates at record low for a 'considerable time' after shutting down the quantitative easing.

As a result, the dollar is very susceptible for incoming data, especially when a report differs from forecast. So today the US currency is very volatile and can't determine any clear path.

The euro exploited weak dollar

The common currency rose for a third consecutive session against the dollar. Solid stress-tests result may improve confidence in the financial sector. Given that, the TLTRO allotment scheduled in December is going to be more successful than September's. So the European Central Bank may move closer to its goal of exceeding balance sheet by one trillion euro. This view was supported by a quite big purchases conducted since the beginning of scheme. The ECB informed on 1.7 billion euro of covered bonds acquired, more than 800 expected according to Bloomberg.

That gives some time for the ECB to fulfill its commitment. But the bottom line is economic condition, and the final assessment is always based on this subject. And without the significant improvement of economic conditions (drop of the unemployment rate, higher inflation and GDP growth) the speculations for additional measures, including a full scale quantitative easign, will return to the markets.

France bowed under pressure from the European institutions. This country is going to cut its budged deficit in 2015 to avoid sanctions from European Commission. Paris will lower budget deficit by additional 3.6 billion euro. The French economy is in a poor shape as the GDP growth is near zero and the unemployment rate is very high above 10 percent. That coupled with sway swelled debt and deficit above 4 percent of GPD poses a risk that the country's rating might be lowered. Given current circumstances, the French government agreed to employ more prudent policy.

The zloty moved higher

Given recent comments from the Monetary Policy Council, odds for a deeper cut of interest rates are getting smaller. This view was reaffirmed by major investment banks. So one can expect a single cut by 25 basis points in November, that will end easing cycle. A shift of expectations for interest rates in Poland resulted in stronger zloty.

Today the Polish currency rose against its major pairs. Tomorrow's Fed decision may result in increased volatility in the markets. So it may push the Polish currency lower. But a current view for the zloty is to stabilize after today's gains.