Daily analysis 03.12.2015

3 Dec 2015 13:34|Marcin Lipka

What does the market expect from the ECB and how Draghi can exceed the market consensus? The Fed is ready to hike interest rates but Yellen was less hawkish then expected. A strong reaction on the zloty is possible after the ECB decision.

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

  • 13.45: Decision on interest rates from the ECB (survey: reference rate 0.05% no change; median deposit rate at minus 0.3%; average minus 0.33%).
  • 14.30: Conference after the ECB meeting.
  • 16.00: Non-manufacturing ISM (survey: 58 points).

Expectations and exceeding the consensus

In the short term for FX participants the most important message is whether the ECB exceeds expectations or not. Reading Reuters or Bloomberg surveys or investment bank reports we can try to build the consensus before the central bank meeting.

Firstly Draghi is expected to increase the QE by around 10-15 billion euro to around 70-75 billion euro on the monthly purchase program. Additionally the ECB will probably lower the deposit rate. The median expectation from the Bloomberg survey suggest that the benchmark would be cut to minus 0.3%. The average, however, is lower – minus 0.33% due to the fact that 13 out of 44 surveyed expect the cut to minus 0.4%.

It is also crucial how the central bank communicates the QE extension. The market anticipates that the easing is going to be extended to March of 2017. Moreover if the QE is extended further the pressure on the euro might be stronger.

The easy solution to exceed the expectation would be deeper deposit cut and larger than expected QE increase. If the QE tops 80 billion USD/month and commercial banks have to pay 0.4% for keeping the money on the ECB account than the base case scenario would be a fall of the EUR/USD around 100 pips.

A further downward impulse for the euro may come if Mario Draghi decides to extend the QE operation beyond Q1 of 2017 or just decides to implement the “open operation” without any certain end date only with a condition regarding inflation.

Combining all “dovish” signals might push the EUR/USD even toward mid 1.03 level. It is not the base case scenario but concerning the determination of some ECB members and their recent comments and the idea that Darghi exceeds expectations this view should also be considered.

On the other hand it is worth to note the other view. It may be possible that may investors might have overplayed the ECB action. There is a strong opposition inside the Committee, which is against more easing. Additionally the central bank should keep some tools for the future in case of the need for future actions.

On the other hand it is worth to note the other view. It may be possible that may investors might have overplayed the ECB action. There is a strong opposition inside the Committee, which is against more easing. Additionally the central bank should keep some tools for the future in case of the need for future actions.

This scenario also cannot be excluded taking, but regarding the most recent comments from the ECB chief Peter Praet on deanchoring inflation expectations or suggestions from Mario Draghi to do what we must to lift inflation there is higher chance for the ECB to exceed the expectations or not.

Yellen slightly more dovish

Comments from Fed's officials who are close to the consensus confirms the base case scenario regarding tightening the monetary policy in December. However, it is worth to note comments from Janet Yellen who did make some interesting remarks on the pace of hiking the benchmark

So far Fed's officials have been claiming that the FOMC members would have to “reasonably confident” that the inflation can move toward the target. Yesterday Yellen said that the future pat of rate increases could depend on the “actual progress” of inflation. The change brings more strict argument, can give an excuse for a pause or even reverse the moves if the PCE remains below the target.

The foreign market in few sentences

Regarding the available information there is a higher chance that the ECB would like to exceed the market expectations. Regarding the scale the EUR/USD might drop around 100-200 pips in a matter of hours. On the other hand if Draghi delivers less dovish message then the EUR/USD might rise even toward 1.07-1.08 range.

The PMI was fairly good

The ECB meeting might not only create the volatility on global FX market but can also bring nervousness to the zloty. In case of more aggressive then expected easing from the ECB the EUR/PLN can be pushed toward 4.25 and the USD/PLN might soar toward 4.10.

It is much harder to anticipate moves from the on the Swiss franc. Assuming that in case of more easing the SNB would like to secure the currency from strengthening the franc should remain at or below 3.95. However if the policy makers from Zurich decides that pressure from the ECB is too strong we may quickly seen the fall of EUR/CHF to around 1.06 and the rise toward 4.00 on CHF/PLN.

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

Range EUR/USD 1.0550-1.0650 1.0650-1.0750 1.0450-1.0550
Range EUR/PLN 4.2600-4.3000 4.2600-4.3000 4.2600-4.3000
Range USD/PLN 4.0000-4,0400 3.9600-4.0000 4.0400-4.0800
Range CHF/PLN 1.4950-1.5050 1.4850-1.4950 1.5050-1.5150

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.4950-1.5050 1.4850-1.4950 1.5050-1.5150
Range GBP/PLN 6.0400-6.0800 6.0000-6.0400 6.0800-6.1200

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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 Dec 2015 18:17

Afternoon analysis 02.12.2015

2 Dec 2015 13:45

Daily analysis 02.12.2015

1 Dec 2015 17:29

Afternoon analysis 01.12.2015

1 Dec 2015 13:25

Daily analysis 01.12.2015

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