Daily analysis 05.12.2016

The market calmed down relatively quickly after initially nervous reaction to the result of the Italian referendum. Bloomberg’s survey before the ECB meeting. Despite positive information regarding Poland’s rating, the zloty is weak against the main currencies, as well as against the forint.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• 16.00: ISM for the American services sector (estimations: 55.5 points).

Reactions to Italian referendum

The result of the Italian referendum caused nervous reactions among investors. This was caused by the scale of the current Italian administration’s failure. Approximately 60% of citizens were against the reform. The attendance in the case of this referendum was at the level of 65%.

Moreover, Prime Minister Matteo Renzi announced his resignation shortly after midnight. The EUR/USD went down to the level of 1.05 relatively rapidly. This was its two-year minimum. The global increase in risk aversion also caused an overvalue of oil prices, increase in the yen’s value and decrease in profitability of the American debt.

However, this negative sentiment didn’t last for long. As soon as new quotations on the Italian treasury bonds had opened, it was clear that there’s no appetite for their large sale. Additionally, one of the main reasons for a relatively moderate reaction was the belief that events in Italy will increase the likelihood of keeping the present level of QE by the ECB, for the next six months.

The EUR/USD worked-off relatively quickly as well and returned near 1.0650. However, the QE extension is not a positive information for the main currency pair. Therefore, its appreciation potential should be limited. Moreover, profitability of the American treasury bond has been increasing since morning. This means that the recent events shouldn’t be significant for evaluation of the future interest rates in the USA.

Bloomberg’s survey

At the break of November and December, Bloomberg conducted a survey regarding expected changes in the monetary policy of the ECB. Approximately 70% of surveyed economists claim that purchase of 80 billion euro worth assets will be extended in December. Moreover, more than 70% of surveyed think that limits in bond purchase will be increased and 40% claim that the limit of minimum profitability will be canceled.

Bloomberg also asked about the expected time of fading-out the QE operation by the ECB. The majority of economists (54%) claim that this will happen in third or fourth quarter of 2017 and 24% of economists think that it will be not sooner than in 2018.

It seems that the announcement from the ECB on Thursday will be similar to this survey’s result. However, it’s very unlikely that Mario Draghi or his associates would refer to speculations regarding potential limits in the QE. This is especially taking into consideration that we will probably hear arguments that justify the QE extension. Therefore, there is a relatively large chance that the euro will remain weak after the meeting.

High sensitivity of zloty

Information regarding Poland’s rating being raised from negative to stable by S&P from Friday, should be interpreted positively by the zloty. This is because it decreases the risk of downgrade of Poland’s loan credibility by S&P in the forthcoming quarters. However, it seems that investors have ignored this information. This may suggest that their sentiment towards the zloty remains negative.

We could observe a similar situation on the Turkish lira at the beginning of November. At that time, S&P raised Turkey’s rating from negative to neutral. However, there was basically no reaction from lira. Moreover, the dollar’s appreciation caused the TRY not only to wear-off against the American currency, but also against the euro or the zloty.

The zloty’s reaction to the referendum results should be interpreted negatively, as well. The dollar reached the level of approximately 4.27 PLN during the Asian session. This caused the zloty to be the weakest currency among the thirty-one currencies of developed and emerging markets, in comparison to the closing on Friday. Moreover, the PLN/HUF went below the 70 level, which is near its three-year minimum. The situation calmed down later on. However, the zloty’s weakness against the dollar re-appeared along with an increase in profitability of the American bonds.

Despite the general negative sentiment towards the PLN, we don’t expect the EUR/PLN to exceed clearly the level of 4.50. Theoretically, the zloty should be strengthened against the euro by the decision from the ECB on Thursday. However, much will depend on the dollar’s condition in the global market, as well as on the American treasury bonds. If their level is high, the zloty’s chances for a rapid work-off will be limited.