The market wasn't able to interpret the jobs data quickly. Economists' expectations before the ECB meeting. The zloty remains fairly stable to the euro. Both the Polish and the euro zone ECB decisions might be slightly positive for the zloty.
No major macroeconomic data that may significantly affect the analyzed pairs.
Indecision
In recent weeks we have observed some visible regularities. When the market sentiment deteriorates, it often has translated a to lower dollar. This is due to the fact that volatility and global uncertainty is expected to push back the second interest rate hike in the US.
On the other hand, when corrections are observed, the dollar tends to gain some value. This correlation, however, was disturbed after Friday's Labor Department reading, which showed a higher than expected payroll number, but an increase below the consensus wage. In the first few minutes after the data was released, both the dollar and S&P 500 futures gained some value, putting more weight on the employment gain than wages. Later both assets dropped.
But at around 17.00 CET, the correlation started to break down. The dollar returned to daily lows, while the stock market was pushed toward daily highs. It is possible that investors came to the conclusion that lower employment compensation increases the odds to keep the rates lower for longer. On the other hand, the solid jobs gain was positive for the overall economy. As a result, the dollar was pushed lower and stocks were pushed higher.
Does this mean a longer disorder than the previously observed correlation? Not necessarily. It all should depend what is finally the catalyst for the move. If, for example, the ECB decides for more aggressive monetary loosening on Thursday, and with the wave of the euro sell-off, the dollar can gain some value. A positive reaction can also be expected on developed stock markets.
The ECB consensus
Today Bloomberg news published the economists' consensus regarding Thursday's ECB decision. Of those surveyed, 59 out of 60 expect that the central bank will lower interest rates. The median cut is set at 10 bps. Most economists (43) also predict that the asset purchase will be increased by a median value of 15 billion euro. Around 1/3 of those surveyed by Bloomberg, think that the QE may be extended beyond Q1 of 2017. Overall, we may assume that it is the market consensus and investors will refer to it on Thursday.
Regarding surprises on a deeper monetary easing that might have a negative effect on the euro, Draghi could cut the deposit rate toward negative 0.5%, increase the QE by 20 billion euro, or extend the asset purchase operation beyond first half of 2017. Implementing all the aforementioned measures should significantly weaken the common currency and the EUR/USD can be even pushed 200 pips lower.
It is also possible that the ECB might surprise with the corporate bond purchase. This would signal that the European policy makers are much more determined to boost growth and increase inflation. The reaction should also be euro negative.
It is also possible that the ECB may fail to meet expectations, as it happened in December. It would also demonstrate once again, quite a considerable division with the central bank, and lower odds for future monetary easing. But, is is hard to expect that the EUR/USD can rise around 300 pips as it happened during the decision last quarter.
Generally there are higher odds, that this time the ECB will be close to the consensus, or would like to exceed it slightly. Very low core inflation readings for February should be a good argument for more skeptical MPC members. As a result, the EUR/USD should be under pressure after the meeting.
Stabilization
Theoretically, the reaction to Friday's US data should be the ideal moment for the strengthening of the PLN. Expectations for a more benign Fed and the appreciation of equity indicies, are the two elements supporting EM currencies. Most of these reactions, however, were observed on the USD/PLN. Changes on the EUR/PLN were modest.
Also, reading the upcoming ECB decision, there is a small probability that it may significantly push the EUR/USD below 4.30. Mario Draghi would have to exceed expectations and additionally, Friday's conference after the Polish MPC meeting should show considerable concern regarding the zloty, for the suggestions that the next move, at least for some members, would be an interest rate hike. The base case scenario is still the EUR/PLN consolidation within the 4.30-4.35 range.
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.
The market wasn't able to interpret the jobs data quickly. Economists' expectations before the ECB meeting. The zloty remains fairly stable to the euro. Both the Polish and the euro zone ECB decisions might be slightly positive for the zloty.
Indecision
In recent weeks we have observed some visible regularities. When the market sentiment deteriorates, it often has translated a to lower dollar. This is due to the fact that volatility and global uncertainty is expected to push back the second interest rate hike in the US.
On the other hand, when corrections are observed, the dollar tends to gain some value. This correlation, however, was disturbed after Friday's Labor Department reading, which showed a higher than expected payroll number, but an increase below the consensus wage. In the first few minutes after the data was released, both the dollar and S&P 500 futures gained some value, putting more weight on the employment gain than wages. Later both assets dropped.
But at around 17.00 CET, the correlation started to break down. The dollar returned to daily lows, while the stock market was pushed toward daily highs. It is possible that investors came to the conclusion that lower employment compensation increases the odds to keep the rates lower for longer. On the other hand, the solid jobs gain was positive for the overall economy. As a result, the dollar was pushed lower and stocks were pushed higher.
Does this mean a longer disorder than the previously observed correlation? Not necessarily. It all should depend what is finally the catalyst for the move. If, for example, the ECB decides for more aggressive monetary loosening on Thursday, and with the wave of the euro sell-off, the dollar can gain some value. A positive reaction can also be expected on developed stock markets.
The ECB consensus
Today Bloomberg news published the economists' consensus regarding Thursday's ECB decision. Of those surveyed, 59 out of 60 expect that the central bank will lower interest rates. The median cut is set at 10 bps. Most economists (43) also predict that the asset purchase will be increased by a median value of 15 billion euro. Around 1/3 of those surveyed by Bloomberg, think that the QE may be extended beyond Q1 of 2017. Overall, we may assume that it is the market consensus and investors will refer to it on Thursday.
Regarding surprises on a deeper monetary easing that might have a negative effect on the euro, Draghi could cut the deposit rate toward negative 0.5%, increase the QE by 20 billion euro, or extend the asset purchase operation beyond first half of 2017. Implementing all the aforementioned measures should significantly weaken the common currency and the EUR/USD can be even pushed 200 pips lower.
It is also possible that the ECB might surprise with the corporate bond purchase. This would signal that the European policy makers are much more determined to boost growth and increase inflation. The reaction should also be euro negative.
It is also possible that the ECB may fail to meet expectations, as it happened in December. It would also demonstrate once again, quite a considerable division with the central bank, and lower odds for future monetary easing. But, is is hard to expect that the EUR/USD can rise around 300 pips as it happened during the decision last quarter.
Generally there are higher odds, that this time the ECB will be close to the consensus, or would like to exceed it slightly. Very low core inflation readings for February should be a good argument for more skeptical MPC members. As a result, the EUR/USD should be under pressure after the meeting.
Stabilization
Theoretically, the reaction to Friday's US data should be the ideal moment for the strengthening of the PLN. Expectations for a more benign Fed and the appreciation of equity indicies, are the two elements supporting EM currencies. Most of these reactions, however, were observed on the USD/PLN. Changes on the EUR/PLN were modest.Also, reading the upcoming ECB decision, there is a small probability that it may significantly push the EUR/USD below 4.30. Mario Draghi would have to exceed expectations and additionally, Friday's conference after the Polish MPC meeting should show considerable concern regarding the zloty, for the suggestions that the next move, at least for some members, would be an interest rate hike. The base case scenario is still the EUR/PLN consolidation within the 4.30-4.35 range.
See also:
Afternoon analysis 04.03.2016
Daily analysis 04.03.2016
Afternoon analysis 03.03.2016
Daily analysis 03.03.2016
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