Daily analysis 09.03.2016

Will Mario Draghi take the lead in tomorrow's ECB meeting and loosen the monetary policy more than expected? The EIA report shows a longer period of crude oil oversupply and the average price of Brent per barrel is below 40 USD till Q2 of 2017. The zloty remains stable before Thursday's ECB decision.

• No major macroeconomic data that may significantly affect the analyzed pairs.

What will Draghi do on Thursday?

A few days ago we presented the Bloomberg consensus regarding the ECB decision. According to the median expectations of economists surveyed by the news agency, the euro zone MPC is expected to lower the deposit rate by 10 basis points and increase the asset purchase operation by 15 billion euro per month.

In the survey, some economist also expected that the QE would be extended beyond the first quarter of 2017 and the ECB will decide to purchase corporate bonds. It is also possible that central bankers will introduce different levels of deposit rates for financial institutions similarly to the BoJ and SNB model.

All of these activities are assumed to push the inflation toward the goal and decrease the financing costs both for the public and private sector. However, many economists, also within the central bank, question the effectiveness of such measures. But, Mario Draghi seems to be determined to bring the inflation toward the central bank target. It is clear, especially recalling his February speech, where he tried to dismiss all arguments suggesting that central banks should not react to the CPI below the 2% target.

The ECB chief in a document entitled “How do central banks meet the challenge of low inflation,” tries to present his arguments, that changes in demographics, technological progress, and globalization, push the prices lower, or commodities cycles are not sufficient argument for central bank to abandon or modify the inflation target.

According to Draghi, it would lead to risks that, “a lasting de-anchoring of expectations leading to persistently weaker inflation.” The ECB chief claims that, “even what began as a positive supply shock can turn into a negative demand shock. As inflation expectations fall, it pushes up real interest rates, producing an unwarranted monetary tightening. Also, the unexpected low inflation raises real debt burdens, which have a negative effect on aggregate demand due to different propensities to consume and invest by borrowers and lenders. Output and inflation then move again in the same direction – but this time downwards.”

Generally, the entire speech carried a fundamental message and it ended with a clear rejection of “inaction.” It should also suggest that some major changes in the ECB policy can be expected to achieve the inflation target faster. As a result, Draghi may not only deliver the market expectations regarding monetary policy loosening but also, at least slightly, exceed them. Hence, we expect that the measures announced on Thursday should be euro negative.

Bearish EIA estimates

Despite recent oil gains, the EIA report suggested more oversupply and longer periods with depressed prices. In February, the EIA expected that crude overproduction would drop below 1 million barrels/day in Q3 of 2016, and the market would be balanced from Q3 of 2017. But in the March data, the oversupply environment is expected to last until the H1 of 2017, and the production is expected to exceed the demand until the prognosis period ends (beginning of 2018).

The EIA additionally assumes that the average Brent price will be 34.28 USD/barrel in 2016 and 40.09 in 2017. This means a reduction of the average price by 3 USD for this year, and almost 10 USD for the next from previous estimates. It is hard to say whether these forecasts will turn out to be true, especially considering that the recent volatility is really high. But, if that happens it would be a good news for Poland as an oil importer, and also for Polish divers who will not pay more for gasoline or diesel than 4.50 till the end of 2017.

The zloty remains stable

The zloty has been stable in the recent hours, and even we could point some areas of strengths, because in periods of similar risk aversion the PLN was loosing up to 0.5% to major currencies. Stable trading may also be a result that some investors are already try to open long positions on Polish assets. If the ECB meets or exceeds expectations and Polish MPC keeps the neutral stance, it might be zloty positive.

However, in our opinion most of the move has already been priced in in the zloty valuation. Only a significantly more dovish move from the ECB, or some neutral leaning even toward hawkish comments from the Polish MPC, may push the EUR/PLN markedly below 4.30.