Afternoon analysis 29.12.2015

The euro dropped against the dollar as the market sentiment improved. The Russian rubble extended losses on falling oil price and weak economic reports. The zloty was stable in a low volatility environment.

On Tuesday the broad market sentiment improved. The European markets increased as well as the US index futures. Commodities prices hovered near little above their recent lows. Improvement in the market sentiments means rising pressure on the EUR/USD. The factor responsible for the situation is divergence between the ECB and the Federal Reserve monetary policy.

Cheap oil hurts the economy

As the oil price continues to decline, the crude exporting countries suffer. Today's data on the GDP growth in Russia revealed the cumbersome position of the nation.

In November the GDP dropped 4 percent on a yearly basis. It dropped 0.3 percent from the previous month. It has been the first drop in five months. The government forecast that GDP will drop 3.9 percent in 2015 and it will rebound 0.7 percent in the next year.

Weak GDP numbers negatively affected the rubble and strengthened the impact of oil slide. Today the USD/RUB moved above 72.80. The current level is the highest in history (excluding a brief moment when it moved near 80 in December 2014). Difficulties hit the other oil exporting countries like Kazakhstan, Azerbaijan or Nigeria (more on the issue in the previous commentary).

Stable zloty

In an interview with the PAP agency finance minister Paweł Szałamacha said the budget plan assumptions will not change. The deficit plan is 2.8 percent GDP. The government expects the GDP growth at 3.8 percent and the inflation rate at 1.7 percent. Szałamacha said that social spending in 2016 will be financed with sector taxes and LTE auctions. The finance minister expects in the next years social spending will be financed with increased effectiveness of the tax system.

Important information is that the government will probably postpone the promise to increase the tax-free allowance. (according to the RFM FM radio). Later the PAP agency said that the bank levy will increase to 0.0366 percent from 0.0325 percent. All actions are aimed at the plan to fulfill the promise to keep deficit below the 2.8 percent GDP threshold.

Concerns regarding the stability of the Polish public finance negatively affected the zloty in the fourth quarter. Given the heightened political risk the zloty dropped to the long term lows.

However, in the second part of December the zloty recouped some losses as the anxiety concerning the fiscal stability ebbed. Moreover, the economic performance improved in the last few weeks. The numbers on unemployment rate, industrial production and retail sales exceeded the forecasts. Another important factor is that the new members proposed to the Monetary Policy Council are considered less dovish that previously thought (more on the issue in the previous commentary).

As a result, in December the zloty was the best performing currency in the 31 currencies setting tracked by Bloomberg. The zloty will probably stabilize near its current level.