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Daily analysis 10.03.2016

10 Mar 2016 13:11|Marcin Lipka

What can Mario Draghi do at the European Central Bank meeting today? Surprising decrease in interest rates of New Zealand. The zloty is becoming slightly stronger against the euro. However, a longer depreciation of the EUR/PLN below 4.30 with the ECB announcement consistent with expectations, is not the base case scenario.

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

  • 13.45: The ECB decision regarding interest rates (estimations: depreciation by 0.1% to negative 0.4%).
  • 14.30: Start of Mario Draghi's press conference after the ECB meeting.

Draghi's goal

Recently, we have presented a lot of possible actions of the European Central Bank, and their hypothetical impact on the evaluation of the EUR/USD. However, there is yet another element worth noting. It is very likely that Mario Draghi would like to avoid the situation from December, when the expectations built by statements from the ECB representatives were not fulfilled, and the EUR/USD increased from 1.06 to 1.09.

As a result, it caused the inflation expectations to decrease by the currency channel, and the European export lost a part of its competitiveness. This was not what the ECB wanted to achieve for the past few quarters. Thus, we may expect that this time the actions will go towards at least fulfillment of the market's expectations, in order to avoid another stage of appreciation of the euro.

We can assume that the base case scenario, which is a decrease in deposit rate by 10 base points at the level of negative 0.4% (decision will be made at 13.45) and an increase in quantitative easing by 15 billion euro per month (decision will be made at 14.30), will be fulfilled. Moreover, it is possible that in order to increase the chances for inflation to return to its goal, Draghi must decide to either extend the QE operation, or introduce a deposit rate which gives bigger possibilities in the future, or that suggests a possibility of purchasing corporation bonds, if needed.

Other changes are also possible. The market may interpret them as a dovish approach. Currently, the ECB cannot buy more than 33% of the given country's issued bonds. If this range is increased, we can expect the European monetary authorities to assume an increase in/extension of the QE program in the future.

Currently, the ECB also cannot buy the bonds, which profitability is below the deposit rate (negative 0.3%). For example, the German two-year treasury bonds’ profitability is currently at the level of negative 0.55%. Resignation of this condition allows the monetary authorities to be more flexible, and this may suggest more aggressive actions in the future.

In conclusion, considering the recent testimonies of Mario Draghi, a record low base inflation, and a generally mild approach of the majority of central banks worldwide, there is a chance that the ECB fulfills at least the market's expectations, if not tries to exceed them. Thus, we should see a pressure on the euro, and a visible depreciation of the EUR/USD, which should be in the range of 50-150 pbs, depending on the scale of actions.

Surprise from the RBNZ

Despite that investors were speculating for a longer time about a possibility of cutting interest rates by the monetary authorities of New Zealand (RBNZ), only two out of seventeen economists surveyed by the Bloomberg agency, expected a cutting by 25 bps to 2.25% in March.

The Bloomberg agency wrote that some of the market participants were confused by the testimony of the RBNZ chairman in February. According to the chief economist of the ASB Bank in Auckland, Nick Tuffley, it contained suggestions that, “the RBNZ is very far from considering cutting interest rates.” Stephen Topilis, the RBNZ chief analyst, shares this opinion. He claims that his team analyzed the testimony of the RBNZ chairman many times, and he cannot understand how the cutting of interest rates in March was possibile.

Because of the fact that the decision was unexpected, it caused an over 2% wear off of the New Zealand dollar, commonly nicknamed the kiwi. It is also worth noting, that this wear off is a result of a quite dovish announcement from the RBNZ. It says that, “there might be a need for a further monetary policy easing, in order to ensure the future inflation value is near the central range of the central bank's goal.”

Slight strengthening of the zloty

It seems that the scenario we suggested regarding the zloty becoming stronger due to expected increase in monetary easing by the ECB, and the MPC leaving interest rates unchanged, is slowly fulfilling. Today, the EUR/PLN begins to go down to the area of 4.31. It can also be seen on the PLN/HUF pair, which is closer to exceed the level of 72. This is the highest level since January, when the S&P downgraded Poland's rating. A relative stability of the forint is a result of the market's expectations regarding the easing of the monetary policy by the Hungarian Central Bank, if the ECB decides to continue the easing of monetary conditions.

On the other hand, we still do not expect the EUR/PLN to go clearly below the limit of 4.30, if the ECB fulfills the base case scenario. A more constant move towards the level of 4.30 per euro can probably be caused by a visible exceeding of the market's consensus, and a depreciation of the EUR/USD by 100 pbs.

10 Mar 2016 13:11|Marcin Lipka

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.

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