Daily analysis 04.12.2014

Will the expectations filled with excitement before the ECB summit be satisfied by Mario Draghi? Test of level of 120 yens per dollar before next week's elections in Japan. Putin wants to fight against speculators on the currency market. No surprises from the MPC. They maintained their positive relation towards national currency.

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

• 13.45 CET: Decision about the interest rates in the euro zone (estimations: without changes on the level of +0.05%; deposit minus 0.2%).
• 14.30 CET: Mario Draghi's press conference after ECB summit.
• 14.30 CET: Weekly applications for the jobless claims from USA (survey: 295k).

Draghi. Yen. Putin

The dollar gained quite clearly on the global market, during recent days. We began the week in limits of 1.2500 on EUR/USD and today we pay not much over 1.23 dollar per euro. There were a few factors that were crucial for variations on this currency pair (expectations before ECB summit; increasing probability of raising the interest rates on the other side of the ocean in mid 2015; we wrote wider about it in previous three analyses). Before today's summit of European monetary authorities there will be a question – to what extent these information are included in the prices, and what would Draghi have to do to maintain the strong short-term drop pressure on EUR/USD.

Investors should already include the crucial information from previous month in the prices, in a significant degree. We are mainly talking about the speech of the ECB chief in front of the European Parliament, where he clearly announced, that the purchase of national debt lies in the competence of central bank and reviving the inflation in direction of 2% aim “as soon as possible” is necessary.

We have to add here some statements of one of the most important members of European monetary authorities – Vitor Constancio. ECB vice-chief said that 2015 Q1 will be a good test of instruments introduced so far (will they increase central bank's balance). If it appears that they do not fulfil the expectations “we will have to consider purchasing some other assets, including treasury bonds on the secondary market” - said Constancio.

So at 14.30 Draghi will have to show, that the above statements have some confirmation in facts and preparations for “full QE” are going “full speed ahead” and when necessary, the central bank will begin purchasing national instruments of debt. The base case scenario (which should not cause a significant reaction) is mostly a repetition of previous communicate and maintains the expectations during the conference that the decision about QE will be made probably within few upcoming months.

Of course there is a possibility that ECB chairman will want to take this chance and take EUR/USD even lower and convince the market that his plan of fast inflation's revival is supported by the majority of Bank's members. Thus, during the conference there may appear some suggestions about QE but also about purchase of private debt, or e.g. securities issued by European Investment Bank. On the one hand it increases the pool of whole stimulation, and on the other maintains the game “under the biggest bazooka” for a longer time. Such situation is usually mostly preferred by the market - “something now, and a hope for more”.

However, the new macroeconomic prognoses, may be a certain obstacle in quite aggressive forcing of deeper quantitative easing. The inflation for 2015 will probably be revised downwards in relation to September's estimations on the level of 1.1%. However, there still is a question, in what tempo will the prices in 2016 and 2017 grow, according to the Bank (it does not have to be far from the aim of 2%). Even bigger unknown are the expectations concerning the economic growth. Year 2014 is “lost” anyway, however the predictions for the upcoming years, do not have to be worse than recently (+1.6% and 1.9% respectively for 2015 and 2016). If the ECB models will react “positively” on a clear wear off of euro and significant drops of energetic resources, we can even expect a revision upwards. Thus, it will not be a good moment to announce bigger stimulation (or at least the hawkish part of the members, will have a good argument to use).

Putting all of these arguments together, it is not excluded, that this time Draghi will hold on with increasing the expectations concerning “full QE”. He will probably use the conference to “gather” some last impulses, and he will save the heavier “ammunition” for the summit in January.

There is only slightly more than a week left to the early election in Japan. Yen also begins to feel this pressure. It is only a few pips below the round level of 120 per dollar. Everything suggests, that prime minister Abe, will receive the mandate for another 4 years. Renewed legitimisation of his economic policy, may give him fuel for further stimulation. This on the other hand, should still wear off the Japanese currency, although USD/JPY should not cross the level of 122 by the end of the year.

Today the Central Bank of Russia announced, that it decreases the value of dollar's liquidity for the banks. Up until now, the financial institutions had to pay 150 basis points above LIBOR. Currently repo operations will be burdened with only a half per cent “commission”. This should theoretically decrease the tense on the real market. However, by such frustrated and speculated market, practically only a strong intervention of central bank (at least 10 billion USD) may calm down the situation. The problem is, that weaker currency is an advantage for Kremlin at the moment, because despite the dropping prices of oil, it allows maintaining the budget incomes expressed in roubles, on the level of earlier estimations.

However, to calm down the interior sentiments, Putin said in his today's speech in front of the combined chambers of Russian parliament, that some serious steps in fight against the currency speculators will be undertaken. And it will certainly occur in some moment of time. However, central bank will have to pick a good moment, in order to conduct such operation effectively. First of all we will have to observe the rebound on the resources, or at least their longer stabilisation. Interventions in time of further drops of Brent oil, may end like the one in October – with the exchange of 30 billion USD of reserves, without any particular effect.

Thus, until the situation on oil will not be stable, the speculators will continue to gambol about on the Russian currency's market, and the aim in areas of 63 presented on USD/RUB pair presented in yesterday's “joke”, does not have to be so far from reality. However, on the other hand, when the crisis will occur, the rebound will probably be very strong, because nobody will want to be “the last to close the door”.

In conclusion, the expectations excited before today's ECB summit may not be fully satisfied. It might be used to generate a small correction. However, it is difficult to expect a clear bounce (above 1.2400), especially before tomorrow's data from American labour market.

According to expectations

This time MPC did not surprise us in any matter. The interest rates remained on unaltered level and during the press conference chairman Belka, according to incoming data, has signalised a neutral approach in monetary policy. The Council kept only one thing out of the mild elements. It was a part of a statement in which they leave themselves some space for the interest rates cut in case of external situation's deterioration.

For the MPC the base case scenario is to observe the situation, with an attitude to maintain the the interest rates on unaltered level in case of maintenance of current economic business cycle in the country. The president of NBP also cancelled his recent suggestions about a danger of stronger zloty in a certain way. He said, that the national currency is evaluated on the base of external situation.

Today it will be Mario Draghi's speech, that will play “first fiddle” to the zloty. Due to the fact that we do not expect that chief of ECB will surprise the market with a milder approach, the pairs of EUR/PLN and CHF/PLN will maintain close to their current level, with a deflection that will not cross 0.01 PLN.

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

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