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Daily analysis 22.10.2014

22 Oct 2014 12:46|Marcin Lipka

Reuters reports on possible corporate debt purchases by the ECB pushed the EUR/USD significantly lower. No gas agreement between Russian and Ukraine. The zloty remains fairly stable to the euro and franc, but the global “greenback” appreciation pushed the dollar above 3.30 mark.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 14.30 CET: US inflation (survey: +1.6% y/y, 0.0% m/m; excluding food and energy: +1.7% y/y and +0.1% m/m).

The ECB. Gas. CPI

The yesterday's session showed that it is hard to be bored on the market even if the macro calendar is empty and most participants are waiting for economic data.

This time the move was provoked by the Reuters report claiming: “Several sources told Reuters the ECB is considering buying corporate bonds on the secondary market and may make a final decision as soon as December with a view to begin buying the bonds early next year”. Despite the fact that the ECB spokesman quickly denied that any decisions were made the rumors cannot be quickly dismissed, especially given that the news agency has a good track record for the ECB leaks (almost predicted the decision in September).

The issue was also raised by the L'Echo newspaper in an interview with the ECB board member Luc Coene. He said that (quotes from Reuters) “we still haven't had a serious discussion about the purchase of corporate bonds” but Coene also added that “if we limit ourselves to buying covered bonds and asset backed securities there is a risk that we would pay too high price. We can prevent that by also buying corporate bonds”. The Belgian central banker didn't rule out the idea so it may be further discussed in the near future (probably every ECB member will be asked about that topic).

Investors still try to evaluate how the ECB is going to increase its balance sheet to 2012 levels (by up to 1 trillion euro) when the TLTRO operation or recent ABS and covered bonds purchases fails short of expectations.

Using the ECB data we can see that in August the value of corporate bonds which are eligible for purchase (non-financial) was around 1.1 trillion euro. The number should be divided at least in two as the ECB would like to purchase only a higher rated instruments. Currently only the BoJ buys corporate bonds. According to the Japanese central bank's site, it purchases only instruments with rating above BBB (by the way they account for only 4% of total QE).

Recently Draghi has said that the asset valued around 1 trillion euro are eligible for purchases. Adding around 500 billion euro in corporate bonds we assume that the 1.5 trillion is within the ECB reach. Probably around 30%-40% may be bought. With the TLTRO operation we are getting closer and closer to the ECB goal.

The direct reaction on the EUR/USD was negative. When the Reuters message hit the wires the most heavily traded currency pair dropped more than half figure. During the morning session in Europe the report still weighs on the euro. Investors are clearly worried not only about the new idea but also are surprised with the determination of the ECB which for a long time was considered as a conservative institution. Additionally it also rises questions about the QE.

Russia and Ukraine didn't reach gas agreement in Brussels on Tuesday. It is hard to judge what caused that almost a certain deal was postponed for the next week especially given that the price was already set (385 USD per 1000 cubic meters) and the 3.1 billion debt repayment schedule till the end of 2014 was put forward. It is possible that the agreement was actually scrapped by the EU proposal that Kiev can payback its debt by receiving Gazprom transfer fees upfront. The Kremlin didn't accept the idea and requested (according to Ria Novosti) that the European Bank for Reconstruction and Development and the IMF to guarantee the payments. Despite that both sides created the additional turmoil there is still high probability that the process ends with agreement rather quickly.

Today the inflation readings from the US will be in focus. The Bloomberg consensus assumes that prices across the pond rose 1.6% y/y. It is worth noting, however, that many economists also expect the reading at 1.7% y/y. As a result, if we get 1.5% it may push the dollar lower, but the EUR/USD will have significant trouble to fight the Reuters report. On the other hand, if we get the CPI at 1.7% the euro-dollar may quickly fell below 1.2650.

Stable Euro. Dollar stronger. Brent oil impact

The global turmoil didn't change both the EUR/PLN and CHF/PLN rates. More volatility was observed on the USD/PLN which is getting closer and closer to the 3.35 level. The greenback appreciation may be deviated by the low inflation reading by the recent ECB leaks. Furhter action for the central bank strong selling argument on the EUR/USD and as a consequence has directly affected the USD/PLN.

Almost two weeks ago we wrote that the regular gasoline may fell below 5.00 PLN (currently Lotos wholesale price in almost 8% lower than on October 8th). Lower prices at the pump are not only favorable for the consumers. According to IMF data Poland imports crude oil valued around 23 billion USD. Taking into account around 20% Brent price drop and “adding” 8% dollar appreciation the PLN oil price dropped around 12% in local currency. It means that if the current price stays unchanged it should bring a significant improvement on the current account (around 200 millon USD on the monthly basis and 2.5 billion yearly).

The zloty should remain fairly stable both to the euro and the franc. More volatility is expected on the dollar and in case of higher US CPI reading we may even top the 3.35 level.

Expected levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.2650-1.2750 1.2550-1.2650 1.2750-1.2850
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.3200-3.3600 3.3400-3.3800 3.3000-3.3400
Range CHF/PLN 3.4800-3.5200 3.4800-3.5200 3.4800-3.5200

Expected GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD 1.5950-1.6050 1.5850-1.5950 1.6050-1.6150
Range GBP/PLN 5.2900-5.3300 5.2700-5.3100 5.3100-5.3500

22 Oct 2014 12:46|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.

See also:

21 Oct 2014 17:08

Afternoon analysis 21.10.2014

21 Oct 2014 12:29

Daily analysis 21.10.2014

21 Oct 2014 9:32

Afternoon analysis 20.10.2014

20 Oct 2014 12:35

Daily analysis 20.10.2014

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