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Daily analysis 05.09.2014

5 Sept 2014 12:31|Marcin Lipka

The ECB significantly loosened the monetary policy pushing the EUR/USD below 1.30 level. More solid data from the US. Data from the labor market. Minsk decisions. The zloty's reaction after the EBC announces the assets purchase program.

Draghi. The data. Payrolls. Minsk

Market surprises are usually random. However, in the case of Thursday's ECB decision, it should not be considered to be accidental. It was indeed a well thought-out move, part of which included the Jackson Hole speech, that aimed at surprising the market.

The situation in which the economy in the eurozone is getting worse and simultaneously the deflation threat is rising, GDP fell the leading indicators didn't give any signs for improvement, hasn't occured for several months. The ECB, however, still wanted to show that it is a relatively conservative institution and the tools implemented in June should help the economy. Draghi seemed to avoid questions on asset purchases, hinting that some time has to pass in order for the TLTRO to take effect and suggesting that the rates have hit rock bottom. The only hint was the Jackson Hole meeting, which on one hand could have given moderate confirmation concerning the approaching ABS purchases, but on the other. could have just been another presentation which won’t bring about any significant results.

The ECB was aware of the mentioned facts and the Thursday's meeting was chosen deliberately to announce the asset purchase program – the move which wasn't anticipated, nevertheless, isn't something totally improbable that could result in the significant trust damage. This surprise element played a key role in the market reacting exactly how Draghi predicted – through the currency channel (the largest euro one-day depreciation in 3 years), bonds (record-low yields) and psychological (easy money policy will stay even for longer).

Putting speculations aside, real decisions have been made, such as interest rate cuts (minus 0.2% on deposit rate and 0.05 on reference) and the Asset Backed Securities (ABS) operation. Not a long time ago ,Draghi claimed that the ABS market is too small to definitively suggest what could be bought there. Thanks to the Q&A session, though, it has been revealed that the ECB will not only buy SME ABS but also Mortgage Backed Securities. The “MBS” market is pretty broad, even despite the fact that the securitization almost dried out. There are still papers issued before the crisis (according to the Bruegel institute, more than 1 billion euro). As the ECB only buys assets with a high rating it should be expected that the total eligible amount (also according to the Bruegel data) does not exceed a few hundred billion euro. However, taking into account the recent TLTRO, it might be assumed that the total operation may even amount to 1 billion euro.

Draghi’s comments also caused some other effects. The decision yesterday showed that it is pretty feasible that he is able to dominate his conservative colleagues (mainly from Germany). It also gives an impression that government bonds purchase (so called “full QE”) will become more real if the situation fails to improve.

The result of that was a strong pressure to weaken the euro. The EUR/USD dropped 200 pips during one session. Additionally, the future for common currency is bleak. The target set, a few weeks ago, around 1.27 will probably be breached. As if this was not enough, the euro may be used more heavily on the carry trade, which may even push the most heavily traded currency pair toward 1.2000. Moreover, currently any correction will probably be used to rebuild the short position.

Besides the data from Frankfurt, exceptionalreports were received from the US. The non-manufacturing ISM rose to the highest level since 2008 and almost topped 60 points. The subindices were also solid (production at highest level since 2004 and the employment rose to 57.1). In line with previous readings from manufacturing, it can be predicted that the following quarters for the US economy can be quite bullish (also firming the dollar).

A ceasefire will probably be announced today between the Ukrainian military and the pro-Russian separatists. Such suggestions were presented by Petro Poroshenko (even the hour was set – 13.00 according to “RT”). However, due to the fact that the news was partly priced in on Wednesday the reaction should not be that visible (albeit it is positive).

Finally, it is worth remembering about today's data from the US. However, after yesterday's hurricane which slammed the currency market, one should not expect a significant reaction. Only readings around 300k or markedly below 200k may spur some rebound. The base case scenario is trading around mid 1.29 range, while in medium term the target is 1.25 or in the scenario of no improvement in the eurozone the 1.20 level can be tested.

Zloty's reaction

The ECB decision should be bullish for the zloty to the euro. It increases the interest rate disparity and gives more incentive for the euro denominated capital to search for yields. Taking into account the tight connection between two economies it should be a primary choice.

There are also still some risks concerning this trade – the Ukrainian crisis, the probability for a deeper rate cut, worsening economy, etc. However, portfolio investors should dismiss most risk and at least some of them take advantage of the strategy. As a result, the EUR/PLN and CHF/PLN should drop, the info for the pound should be fairly neutral and the USD/PLN should continue to rise (with the target at 3.30).

Today the zloty's pairs should be moderately stable with some upside bias when the cease fire is announced.

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

Range EUR/USD 1.3350-1.3450 1.3250-1.3350 1.3450-1.3550
Range EUR/PLN 4.1800-4.2200 4.2000-4.2400 4.1600-4.2000
Range USD/PLN 3.1000-3.1400 3.1400-3.1800 3.0600-3.1000
Range CHF/PLN 3.4400-3.4800 3.4600-3.5000 3.4200-3.4600

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

Range GBP/USD 1.6350-1.6450 1.6450-1.6550 1.6550-1.6650
Range GBP/PLN 5.2300-5.2700 5.2500-5.2900 5.2700-5.3100

5 Sept 2014 12:31|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:

5 Sept 2014 10:37

Afternoon analysis 04.09.2014

4 Sept 2014 12:28

Daily analysis 04.09.2014

3 Sept 2014 17:23

Afternoon analysis 03.09.2014

3 Sept 2014 12:35

Daily analysis 03.09.2014

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