Daily analysis 12.11.2015

The European Central Bank chairman, Mario Draghi, sustains his expectations regarding an increase in scale of monetary stimulation at December's meeting. The euro depreciates due to the pressure of expected easing in the monetary policy. The zloty did not take advantage of the euro's weakness.

In the last few days, there were doubts to whether the European Central Bank will decide to increase the scale of monetary stimulation during December's meeting. This solution was suggested by the chairman Mario Draghi, during his press conference after October's meeting of the central bank. Draghi pointed out the possibility of an increase in assets' purchase and a decrease in the deposit rate.

The uncertainty was a result of the comments from the Bundesbank president, Jens Weidmann. The Chief of the German central bank thinks that sticking to a too loose monetary policy for too long, will bring risk to financial stability. On the other hand, Benoit Coeure from the EBC said that the central bank did not promise to increase the stimulation in December and no decisions have been made regarding this matter.

These comments were reflected in the attitude of the euro. On Wednesday, the common currency made a clear rebound to the dollar, and other significant pairs. However, today the euro depreciated again. This was a result of Mario Draghi's comments. Today, the EBC chairman was answering the questions from the politicians in the European Parliament.

Draghi’s standpoint was definitely dovish. Even though the EBC chairman did not promise to increase stimulation, he seemed convinced that this solution is justified. He pointed out a break in positive tendencies seen on the base case inflation. Mario Draghi emphasised that currently the return of inflation to its goal will be longer than it was estimated in March, when the decision about activating the purchase of government bonds was taken. That is why the European QE can be extended beyond September 2016.

As a result, the euro returned to depreciation. For a moment, the EUR/USD rate decreased below 1.07. There was an improvement in appetite for risk on the wide market, which was reflected in an increase in the stock market indexes.

Overvalued zloty

Despite the fact that the dovish approach of the European Central Bank supports the hazardous assets, the zloty today loses its value. To a certain degree, the Polish currency was harmed by a deterioration in sentiment towards the currencies of the emerging markets. This is a result of the depreciations in the Chinese stock market, which quoted the weakest session for a week. Investors are afraid that the scale of a rebound from August's pit (plus 24%) can be too big in comparison with the withhold of the economy.

In the long term the loose policy of the EBC should support the zloty. Currently, however, we are dealing with a correction after three strong increase sessions.

Additionally, the forthcoming tightening of the monetary policy in the United States is a burden for the zloty. The base case scenario assumes that the Federal Reserve will raise interest rates during the next meeting. Even though the zloty is in a much better situation than the currencies of raw material countries, this factor may have a negative impact on the behaviour of the Polish currency.

Today we will hear the testimonies of four representatives of the Fed (including the chairwoman, Janet Yellen). A confirmation of December's tightening will enforce the dollar, and may limit the zloty appreciation potential.