Daily analysis 06.03.2014

Small variability on EUR/USD in anticipation of today's European Central Bank's summit. Market ignored weaker ADP reading. Very important ECB decision will be held today. Zloty did not react on MPC summit, although its clearly dove meaning. Political aspects of entering the Euro Zone.

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

• 13.45 CET: Announcement of ECB decision (survey: constantly on level of 0.25%).
• 14.30 CET: Mario Draghi's conference after ECB summit.

Stable before ECB summit's result

Past dozen or so hours on EUR/USD market were very calm. Varieties' division of main currency pair were only 40 pips and European session opened at the similar levels as yesterday – in limits of 1.3730. Despite the expectations, the variabilities were not increased by yesterday's ADP data. Private agency, which gathers information on employment in USA, announced that private sector gained 139k new working places, while economists' survey by Bloomberg agency was close to 150k. What is most important, the reading for previous month has been revised downwards by almost 50k (from 175 to 127k). Moody's Analytics (ADP co-operated with them on this research) economists' chief stated in his report comment that “February was another month of worse labor market reading. Employment was low in a lot of sectors. Bad weather, especially in the middle of the month (that is when the research is made – author's note), determined the payrolls. Increase on the labor market is expected along with the coming of higher temperatures”. So why did we not observe any reaction on EUR/USD? First of all, because the weather effect is still a dominating factor of economic activity's fall in USA (though in case of Friday's data this explanation will be a cliché). Second matter is a certain realignment of ADP readings (after revision they got closer to NFP average). Final result of smaller reaction is the fact that we constantly have Friday's official payrolls reading. It is crucial for the market and considering recent differences between ADP and NFP, most of the players did not want to risk by closing the old, nor opening the new positions before tomorrow's data.

Ahead of us is one of the most important ECB summits. The atmosphere before today's meeting of Euro Zone's central bankers was warmed up by Draghi himself. He suggested that in March he will have enough information (inflation data for February, economic projections for 2016) to decide if and in what degree will he loosen the monetary policy. As I wrote repeatedly, there are many tools “on the table” that can be used. The simplest one would be decreasing interest rates (probably by 15 bp) to 0.1%. However, such movement's real influence on economy would be limited (although Euro would weaken). Second – decisively more radical – action is lowering benchmark return (currently on level of 0.0%) below zero (strong sell signal for Euro). ECB claims that it is technically prepared for such action. However disturbances on money market (e.g. capital outflow) can be too big of a cost for the central bank. Ceasing of SMP program's sterilization is also a possible scenario (you will find more about that in previous comment). It would actually cause the introduction of mini-QE (worth about 175 billion EUR), and would also open the way to another movements, close to quantitative easing (another sell signal for Euro). Other ideas that appear on the market are reactivating of LTRO and a program of special, low interest credits for companies from Euro Zone's peripheral countries (rather hardly possible, because the works concerning this idea are still in progress). Despite the fact that only 14 out of 54 economists surveyed by Bloomberg claim that money rates will fall, the market, however, speculates about Draghi's decision for a solution, which would soften the monetary policy (especially that German Bundesbank seems to be more and more flexible in this matter). The optimal solution for EUR/USD bulls on the other hand would be no changes at all. There are some arguments in favour of this concept – a bit better data from Euro Zone and much higher than expected readings for inflation and GDP for the fourth quarter.

In conclusion, ECB will have a hard decision to make. It has to decide if the recent inflation readings and new economic projections take the Euro Zone further from the deflative-stagnative scenario for the economy. Draghi and his collaborators should also decide if the means they will use would have a chance for changing the economic perspectives for better and will not cause other problems. As far as the Ukrainian matters are concerned, both sides of the conflict meet on many levels. It is rather difficult to expect a clear improvement of sentiments in case of finding an understanding as they are relatively good. On the other hand, if another escalation of tension will occur, we can expect a negative reaction on assets directly related with the risk (EM currencies, European stock markets, especially those in mid-eastern region).

Chairman Belka's interesting conference

Yesterday's MPC conference was really interesting. First of all, the new economic projections were presented. Thanks to them we can see that Polish economy will increase this year by 3.5% (approximately a half percent higher than in November's projection) and the inflation this year, as well as in the following, will remain on a very low level (respectively slightly above 1% and approximately 1.8%). Such low prices increase in the future made the Council to prolong the forward guidance (which means leaving the interest rates on constant level, at least until the end of 2014 Q3). The NBP chairman Belka and his collaborators not only have prolonged forward guidance, but also enforced it with the words “at least” (a bit on the pattern of “well below” in Fed unemployment). Thanks to the inquisitiveness of Karolina Słowikowska from Reuters we found out during the conference that the Council debated on prolonging forward guidance until the end of 2014. The difficulties in predicting the world's economic events, however, caused abandoning of this concept (but we can conclude, that if some special circumstances in the global economy will not occur, the scenario of current money cost's maintenance until the end of 2014, will remain in force).

A matter of Poland entering the Euro Zone was another interesting topic developed by Belka. MPC chairman approached this subject from a political and not economic point of view (because of the events that occur at our eastern neighbor). NBP chairman claims that a mid-sized country like Poland having economic problems (e.g. because of outside factors) has much greater chance to receive help from other countries, because if the help would not appear, these problems can quickly move onto other Euro Zone's economies, which of course everyone would like to avoid. That is why they should be more willing to make more courageous decisions in order to defend the economic affair of a country like Poland.

In conclusion, yesterday's conference of NBP president and the announcement undertone had a dovish meaning. Although that they have not caused any direct reaction on the market, they however decrease the chances of Polish currency clearer enforcement in mid term.

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

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