Daily analysis 09.12.2016

Does yesterday’s summit of the ECB mean larger or smaller quantitative easing in relation to the consensus? The whole focus shifts to the USA. The key summit of the Fed. The zloty is relatively stable in the afternoon trade.

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

• 16:00: The investors’ sentiment index from the University of Michigan (survey: 94.5 point)

More or less dovish ECB?

The movements on the euro in the most recent days was quite surprising. We did take note of the fact that the increases on the EUR/USD were built on a bit delicate bases, and the speculations regarding the limiting of the QE will probably not come true. Paradoxically enough, the statement of the ECB in the first seconds after releasing it confirmed the fact that the European monetary authorities are gearing up for decreasing the monetary stimulation, by reducing the asset purchases from April 2017 from the level of 80 to 60 billion euro per month. This caused the increase of the EUR/USD to the level of 1.0870.

After a while, however, it turned out that the policy of the slightly smaller purchases will be continued until the end of 2017 and not just until the 3rd quarter of the year. This was enough for practically bring the base case scenario to life regarding the QE, even though the final amount will be slightly smaller assuming that both options take into consideration extinguishing the QE by 10 billion euro per month after September / December (760 billion vs 690 billion euro).

However, even if the market is a bit disappointed with the development of the situation, then the conference of Mario Draghi showed that the central bank will maintain its extremely mild attitude. The ECB president emphasized multiple times that there was no discussion on the extinguishing quantitative easing. Additionally, the condition of the minimal profitability, assuming purchasing the treasury instruments, was abolished and the ECB can also buy bonds of 1 year maturity. Taking into consideration the whole of the statement, it was more or less in line with the consensus formed over the recent weeks despite small differences related to the amount of the quantitative easing. As a result, the EUR/USD got back to the levels around 1.0600, from which this main currency pair started its increases in the beginning of the week.

A clear stance from the ECB practically closes the subject of the monetary actions for a solid couple of months. Also the incoming data from the eurozone will have a relatively limited affect on the euro quotations, as it will not change the base case scenario for the monetary policy. Eventually the majority of the movements on the main currency pair will a consequence of the behavior of the dollar, not the euro.

The key Fed summit

As we stated in the Wednesday analysis after the ECB summit, the focus of the market shifts to the next week’s Fed decisions. The interest rate increase by 25 base points is practically sealed, however, on Monday the market will start wondering if the median of the expectations for 2017 will change from 2 to 3 rises by 25 base points. We think that the second scenario is very likely, and at this moment not quoted by the market. There is, therefore, a risk that the general appreciation of the USD in the coming week will bring the main currency pair even below the level of 1.05, testing new, minimums of several years.

Today, on the other hand, it is worth taking note of the sentiment among the consumers at the University of Michigan. The recent publications of the Conference Board (also examining the sentiment of the consumers) were rising to the level of 9-year maximums. If also positive tendencies will be confirmed by the today’s publication (exceeding the level of 98.1 point means 11-year maxims), then the EUR/USD will end this week over the level of 1.0600.

The zloty after ECB and before the Fed

The decision of the ECB on prolonging of the quantitative easing and a very dovish press conference with Mario Draghi should be positive for the zloty, especially against the euro. After a bit chaotic trade, the EUR/PLN is quoted below the level of 4.45. Also these news should make the franc get back below the level of 4.10 PLN, assuming, of course, that there will be no major shake ups on the EUR/CHF.

A threat to the better condition of the zloty against the euro or the franc is the next week’s summit of the Federal Reserve. If the market takes it as very hawkish (e.g. three rises in the coming year and relatively hawkish conference), then yet another strong inflow of the capital to the dollar can happen, which could cause the weakening of the currencies from the emerging market not only against the USD, but also to other currencies, e.g. euro and franc.

According to us if such reaction occurs, then it will be very limited in terms of its duration. A very mild message from the ECB should significantly reduce the risk of the EUR/PLN or the CHF/PLN going back to the levels of respectively 4.50 and 4.20. It increases the chances for falls of these currency pairs in comparison to the current quotations. On the other hand, when it comes to the quotations of the dollar and the pound, then they will probably remain relatively high, and the testing of the most recent maximums is not excluded.