Negative deposit rates, withholding of SMP program sterilisation, decreased forecasts of inflation and preparations for QE, and despite all that Euro keeps on strengthening. Expectations before the report from the American market. Zloty maintained relatively stable during yesterday's commotion, however, there are still chances for further strengthening.
Most important macro data (CET). Estimations of macro data are based on Bloomberg's informations, unless marked otherwise.
- 14.30 CET: Report from the American labor market (survey: new jobs in non-agricultural sector – 213k; unemployment rate 6.4%; increase of rate per hour m/m: +0.2%).
Everything but QE. FX quintessence. NFP
Yesterday we had a very interesting day when it comes to monetary policy, as well as the behaviour of currency market. It showed how FX tries to evaluate gained informations in short term, and how central bank tries to cross the investors' expectations, what is not always successful anyway.
At 13.45 CET we received information from EBC that the European monetary authorities decreased the reference rate, as well as the deposit rate by 0.1%, what takes the second one of them to the negative level. The scale of the decrease, however, was a little lower than the market's estimations, so we quickly witnessed growths on EUR/USD – by 30-40 pips to 1.3640.
The situation quickly changed when the market received a communicate that during the conference the information about additional elements of monetary policy will be presented. The northward movement has suddenly turned and we have fellin the limits of 1.3560 and remained there until 14.30, which is the start of Mario Draghi's conference.
Already in the second paragraph of the communicate read by EBC president we have heard what does the “package” prepared by the bank's Board of Governors consists of. Apart from cutting the LTRO operation, which was announced earlier, preparation for implementation of assets purchase program and withholding of SMP program sterilisation. In that moment EUR/USD dived in the areas of 1.3500, what was quite a logical movement as the “package” contained definitely more elements soothing the monetary policy, than the market expected.
Further on Draghi explained, what should particular actions be based on. “Aimed” LTRO is a program of 400 billion Euro worth of cheap credits for households (with exclusion of mortgages) and for enterprises. I have mentioned about the possibility of adopting a similar operation in previous comments. It has also a lot in common with a similar program used in United Kingdom, and is also an answer for multiple appeals to make financing of enterprises easier, especially on Euro Zone's peripheries, where interest rate on the credits is much higher, that e.g. in Germany.
EBC president has also clearly emphasized that the works on the possibility of private debt purchase (as ABS) are in progress. It would be a similar operation as the one performed by FED. One problem, however, is still quite low liquidity of that market and not clear evaluation of these instruments. The chairman, however, clearly emphasized that it is an option that might be used.
We should also not forget that EBC withheld the SMP program sterilisation. As for now central bank “gathered” the liquidity from the market created by purchasing of treasury bonds of peripheral countries in the peak of crisis. It is approximately 150 billion Euro and it was often said, that withholding of sterilisation is “mini-QE”.
Mario Draghi also introduced new economic forecasts of EBC for years to come. In comparison to March survey, the inflation has been revised clearly downwards. HICP in 2014 is supposed to amount 0.7% vs previous estimations on the level of 1.0%. In the next years it will be respectively 1.1% and 1.4% in comparison to respectively 1.3% and 1.5% announced in March. Economic growth has also been decreased, although slightly weaker development this year should be worked off in 2015.
Getting back to the market's reaction, the investors playing against Euro received much more than they could really count for – thus 100 pips fall. However, when the conference took place, they have been slowly realizing their profits. Additionally, certain doubts appeared in those “playing short”, could the use of all other elements take QE further (the use of medium bazooka can delay the introduction of the big one). The crucial moment was the return above 1.3550, where “short positions” began to get scared, that the increases may be continued and they will begin to gain losses. Then the so-called “short squeeze” occurred (short positions are closed with opposite orders, which means that repurchase of given instrument – in this case Euro, is necessary, and that causes the increase of its price). The players placing on growths joined and the result of it was finishing the day above the opening level. Yesterday's behaviour of FX can be described as quintessence of currency market – constant “pushing” of professional participants on the market of zero sum.
The dust after Thursday's EBC decisions and market madness is slowly falling today. However, an important event is still ahead of us– report from the American labor market. After Wednesday's ADP data (clearly below the forecasts) the chances that payrolls reading will be clearly above 200k, have significantly decreased (this could also be partly a reason of quite fast escape of short positions during EBC press conference). Thus if NFP will be quite weak (170k and below), and the revisions of data from previous months will be “negative”, we can then expect more growths on EUR/USD and even the approach under 1.3700 would be not excluded. On the other hand, in case of good payrolls – above 250k without revision for April and March, we can expect that we will fall in the mid regions of 1.35 or even test yesterday's minimums.
In conclusion, yesterday's market reaction does not have to mean, that we are coming back to the increases on EUR/USD. Specific positioning of investors caused the movement upwards. However, if the upcoming data from USA will be good and the Euro Zone will not be able to handle the falling inflation and slow increase, the falling pressure on euro-dollar will remain and the space for hypothetical increases will be very limited.
Calm on zloty but further strengthening is not excluded
Zloty reacted on the informations coming from EBC in a relatively calm way. Most of the time we were moving in the limits of 4.12 plus minus 0.01 PLN. USD/PLN was equally stable, but when we observed some clearer growths of EUR/USD, the dollar-zloty pair came then to the level of 3.02.
Yesterday's decisions of EBC are in general positive for the Polish currency and the debt market. It should cause the inflow of wallet capital to the Polish territory, what will be the element enforcing PLN and decreasing the profitability of national treasury securities. The counterbalance for such movement (on currencies) could be a real threat of interest rates decrease (at the moment, despite Belka's press conference, it is very unlikely) or NBP interventions. However, this second element will probably not appear, before the rate of EUR/PLN will not start from the digit three.
In conclusion, considering the EBC policy, we should expect stronger zloty all the time. Today EUR/PLN will probably remain relatively stable, but if we would receive weak payrolls, the test of the level 3.00 downwards on USD/PLN would not be excluded.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate: