Daily analysis 08.12.2016

The EUR/USD is increasing before the ECB meeting. The mining reduction from the non-OPEC countries may appear significantly smaller than expected. This morning, the zloty maintained the majority of its growths. However, the Polish currency wore-off clearly at noon.

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

• 13.45: The decision from the ECB regarding interest rates and the QE program.
• 14.30: Mario Draghi’s press conference.
• 14.30: Weekly jobless claims from the USA (estimations: 257k).

Will the base case scenario be fulfilled?

The recent ECB meetings, as well as the statements from its representatives, suggested a large likelihood of extending the QE program in December. This likelihood also referred to the matters of minimum profitability, exposing the ECB to particular euro zone countries’ bond tranches and the bank’s total involvement in treasury instruments of particular countries. However, the market is becoming increasingly doubtful regarding the fulfillment of this scenario.

Of course, sometimes the monetary policy tends to surprise. This refers to the financial market, as well as to the real economy. This way, it’s more likely that such a decision will be interpreted the way as the central bank wanted. However, the result would most likely be negative regarding today’s situation.

The euro zone’s base case inflation remains low (0.8% YoY). The fiscal policy doesn’t support the economy. Moreover, the external situation is also far from perfect and some countries may show an increasingly protectionist approach towards the trade exchange of other countries. This would definitely be negative for the EU economy. Therefore, any decision from the ECB that’s different than the consensus would be surprising.

We claim that the ECB will extend the QE program until at least the end of the third quarter of 2017. Moreover, other crucial elements regarding treasury bond purchases, will most likely be modified as well. This should cause the euro, as well as profitability of the euro zone countries’ treasury bonds, to decrease.

We also don’t expect any suggestions from Mario Draghi regarding the fading of monetary easing. Such statements would only weaken the message from the monetary authorities. This argument is also in favor of the euro’s wear-off.

Will reduction be lower?

The speculations regarding the difficulties in achieving an agreement between the non-OPEC oil producers. Yesterday, Bloomberg referred to three people who are familiar with the topic and reported that a portion of a 300k barrel reduction (shared by thirteen non-OPEC countries, not including Russia), will result from a natural decrease in production for 2017.

Russia’s obligation to reduce its mining by 300k barrels is still on the table. This means that after adding the reduction of the OPEC countries, it will amount to a total of 1.5 million barrels. Such a significant reduction should keep the oil quotations near their current level. Depreciation is possible if Russia resigns the agreement.

Zloty’s getting weaker

The zloty was relatively stable against the majority of currencies this morning. The PLN was sustaining its recent growths against the HUF, as well. However, an increase in uncertainty and the higher profitability of the euro zone treasury bonds caused the zloty to lose value against the euro, which went above the 4.45 level.

If the base case scenario regarding the ECB fulfills (more about this in previous paragraphs,) the zloty should work-off its losses against the euro, as well as against the franc. The EUR/PLN should return to the range of 4.40-4.45 and the CHF/PLN should go below 4.10 PLN. However, if the decision from the ECB is different than the consensus, the main currencies may become 0.02-0.03 PLN higher than they are currently.