Afternoon analysis 29.09.2014

Today's data strengthened the case for interest rates hikes in the US. The rouble hit new lows. The zloty was little changed. Markets were influenced by some profit-taking after recent significant moves.

Economic sentiment in the euro zone was deteriorated in September – the European Commission informed today. The gauge stood at its lowest level since 2013. It fell to 99.9 points from 100.6 points in the previous month, less than 100 points expected. The index was negatively influenced by deterioration of consumer, industrial and retail sentiment. Conversely, service and construction sentiment was improved. As a result, business expectations index fell to 0.07 points from 0.16 points.

In addition, inflation expectations have deteriorated. Expectations for consumer prices dropped to 4 points form 6.6 points in the preceding month. Similarly, expectation for industrial prices went down to minus 1.8 from minus 0.7 in the previous month.

The date showed weakness of the euro zone economy before the European Central Bank meeting on Thursday. Mario Draghi will unveil details on its plan to purchase asset-backed securities starting in October. The most important issue for the ECB is the deterioration of inflation expectations, what has increased the pressure on the central bank to do more to ward off deflation and bolster growth. In the long term this factor will push the euro lower.

Launching of the ABS purchases in October is going to be the last measure to be used by the ECB from measures introduced since June. In September the ECB said that it will start assets purchases to restore a credit flow to the real economy as it will help to revamp banks' balance sheets and their capital adequacy ratios. As a result, the next TLTRO in December may be more efficient than that in September, when banks made bid only for 82.6 billion euro of four year cheap loans.

Until now, the actions undertaken by the central bank, didn't restore the credit flow to the real economy. In August private credit dropped 1.5 percent on a yearly basis, the ECB said in the previous week. The latest data didn't encompass September when the TLTRO was allotted, by it reflected the period after June, when the ECB cut interest rates at record low and introduced the negative deposit rate for the first time since. Mario Draghi said the major barrier for the credit flow is risk-aversion, what will bee limited due to the ABS purchases.

Dollar fell despite solid data

Today's US data have provided additional arguments for the hawkish part of the Federal Reserve. PCE price index was up 0.1 percent. It was anticipated to remain at last month's level. In addition, the households expenditures rose 0.5 percent, more than anticipated and the income growth was 0.3 percent, a higher pace than in the previous month.

The dollar fell despite the data that strengthen the case for interest rates hikes in the US. In addition, the euro rose, although the data concerning the euro zone were weak. After the EUR/USD fell to its lowest since November 2012, the dollar was demanding for some correction. This scenario is fulfilling right now. But in the long term the dollar will rise against the euro due to expectations for interest rates increase in the US and the opposite move in the euro area.

The rouble at new lows

The Russian rouble fell about 1 percent against the dollar and the euro. As a result, the Russian currency dropped at its lowest against the US currency in history – the USD/RUB rose as much as 39.59. Chief economist at ING Groep in Moscow Dmitry Polevoy said, the rouble may fell to about 11 percent against the dollar. The EUR/RUB also moved near its highest level in history.

The Russian currency fell due to increased concerns that the economy will be deteriorated due to sanctions imposed by the West about Moscow's involvement in the Ukrainian crisis. In addition, the Kremlin has to cope with low oil prices, that results in lower budget revenue. The Russian government needs oil price above 100 dollars to ward off financial problems and recession. A wider view was presented in our Friday's commentary.

Stable zloty despite heightened risk

The zloty was little changed despite increase of risk-aversion in the markets. The sell-off in the stock markets and increase of bond prices probably were triggered by turmoil in Hong Kong and portion of weak data from euro zone. It was used as the reason for profit-taking before the end of the month after recent significant moves and it won't change trend in the longer term.

The USD/PLN rose above 3.30 on the morning, but later it fell. To sum up, the zloty is stable, despite increased risk-aversion in the markets. The Polish currency is waiting for the PMI report – last data before the MPC decides on rates in the next week. The cost of credit will probably be cut by 25 basis points. In the longer term, the zloty will continue to drop against the dollar and the pound and it will remain stable against the euro and the frank.