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Daily analysis 03.10.2014

3 Oct 2014 12:25|Marcin Lipka

Draghi confirms asset purchases lasting at least until June 2016. No details about the amount. The pound is getting closer to the one-year-low rage. Last crucial data before fairly empty next week calendar. The zloty in line with expectations reacted fairly calm after the ECB decision.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 14.30 CET: US employment data. Non-farm payrolls (215k). Unemployment rate (6.1%). Wage growth (+0.2% m/m). Participation rate (62.8%).
  • 16.00 CET: Services ISM index from the US (survey: 58.5).

The ECB. Payrolls and the pound

There are some opinions criticizing Mario Draghi statement. The main concern raised by his opponents is a fact that we didn't get the total amount of assets which the ECB is going to purchase. Another issues which brings some discussion is a bit less dovish than anticipated statement which failed to meet some most accommodative expectations. In environment of low inflation/growth this is regarded by many as a mistake.

However, if we look at the monetary policy closer, we should rather regard it as an advantage. In the second paragraph of yesterday's commentary we wrote that Draghi would have to direct the expectations in certain way. At one time not to show any major change in the monetary policy and on the other - give impression that if things fail to meet his projections, the larger bazooka is on the horizon. The majority of the meetings should be a continuation of the policy and only a slim part could be focused on surprises to extend/stimulate a certain reaction in the broader economy.

Getting into the details, it is worth noting that the ECB asset purchase program is supposed to last at least until June 2016. In line with “FT” reports the Greece and Cyprus instrument will be also eligible for purchases unless their rating is below investment grade.

Regarding the size of asset purchase, the exact amount was not revealed. But Draghi noted that instruments which qualified for purchase amounted for around 1 billion euro (our yesterday's analyze almost exactly showed that number). It does not mean that the ECB can buy all available instruments but taking into the account that the securitization revitalizes in the following months we can expect that the purchases may end with 300-400 billion euro.

The remaining part of the conference wasn't really surprising. Draghi emphasized some weak European economy perspectives, lack of reforms, slow GDP growth and etc. He didn't also want to go into more details about the currency exchange rate or the size of future central bank balance sheet (whether it should rise to 2.7 billion or 3.0 billion as both number were recorded in 2012). The ECB chief also clearly stressed that the major central bank goal is to keep the inflation near but below 2% target and other measures are not that crucial.

From the market point of view the conference wasn't as dovish as expected. As a result we could observed that the EUR/USD almost topped 1.2700 level. The stronger rebound was stopped due to expectations before today's job report.

The median estimate of economists surveyed by Bloomberg show that the US economy created 215k jobs last month and the unemployment rate dropped to 6.1%. It is also worth to note that market rumors on a strong revision of last month we it only 142k payrolls were reported.

If we get slightly better data from September (around 20-30k) and the revision for a previous month tops 50k we should expect the dollar appreciation to all other currencies.

However, high estimates increasing the risk of falling short of expectations. Any reading below 200k and lack of revisions may generate a risk for a significant correction on the EUR/USD (especially taking into the account how market is “one-way-directed” and less dovish Mario Draghi). The EUR/USD may be even pushed toward 1.28.

It is worth paying attention to the pound. The British currency is not able to heal the damage after the Scottish voting. The fact wasn't that concerning taking into the account the rising dollar. But since the beginning of the month we are also observing the slide against the euro which really shows the sterling weakness. Additionally we received some soft PMI numbers and two BoE officials stressed that the UK is not yet ready for the interest rate hikes and the rising pound value (referring to the previous moves – author's note) decrease the level of inflation.

In the short-term the pound may further slide or rise very slowly even in a scenario of weaker dollar. In the medium term perspective we should observe some rebound on the British currency. The monetary tightening is on the horizon (Q1 of 2015) and the GBP should resume its appreciation especially to the euro.

No major changes

In line with our expectations all major PLN pairs were pretty stable yesterday during the ECB meeting. Most transactions were processed around 4.17-4.18 on the EUR/PLN and 3.30 for the dollar.

Today the higher volatility is not predicted on the EUR/PLN but much more emotions may occur on USD/PLN. Weaker “payrolls” report (below 200k, no revision for the previous month) should weaken the dollar and overall increase the appetite for the EM currencies. In that scenario we should even expect the EUR/USD to rise toward 1.27 which combined with slight depreciation of EUR/PLN should push the USD/PLN toward 3.27-3.28.

On the other hand, if the US data meet or exceed expectations and the previous month is revised close to 200k we should see another record high levels on the USD/PLN with 3.33 on the site.

Expected levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.2650-1.2750 1.2550-1.2650 1.2750-1.2850
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.2800-3.3200 3.3000-3.3400 3.2600-3.3000
Range CHF/PLN 3.4300-3.4700 3.4300-3.4700 3.4300-3.4700

Expected GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD 1.6050-1.6150 1.5950-1.6050 1.6150-1.6250
Range GBP/PLN 5.2900-5.3100 5.2700-5.3100 5.3100-5.3500

3 Oct 2014 12:25|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

2 Oct 2014 17:22

Afternoon analysis 02.10.2014

2 Oct 2014 12:08

Daily analysis 02.10.2014

1 Oct 2014 17:24

Afternoon analysis 01.10.2014

1 Oct 2014 12:52

Daily analysis 01.10.2014

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