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Daily analysis 22.12.2014

22 Jan 2015 13:01|Marcin Lipka

Inconsistent rumors form the ECB. Keeping the floor on the EUR/CHF would have needed 100 billion francs only in January. Surprising decision from Bank of Canada to cut interest rates pushed the CAD to 2009 lows. Solid industrial production data and speculations on euro zone QE should help the zloty toward the euro.

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

  • 13.45 CET: Decision on interest rates (survey: no change at 0.05%; minus 0.2% on deposits). Not rally clear whether the QE information is supposed to show during the rate decision or during the conference.
  • 14.30 CET: The ECB statement and Mario Draghi Conference.

ECB rumors

On Wednesday afternoon news agencies reported that the ECB is suppose to buy 50 billion government bonds on the monthly basis. What is more interesting the rumors were different at each info provider.

The Dow Jones Newswires, which mainly supply data to “The Wall Street Journal”, and Reuters announced that the ECB is going to buy 50 billion euro worth bonds but the purchase operation is going to last a year. It matches the median estimate which is around 500-600 billion euro on the yearly basis. On the other hand, Bloomberg, reported that the ECB is scheduled to announce asset purchase operation worth 50 billion a month and the program is suppose to last for 2 years. Taking into the account that Draghi starts purchases in March the QE can be worth around 1 billion euro.

The turmoil regarding conflicting reports caused that the volatility increased, but it didn't generate any substantial move in either way at the end of the day. 50 billion on the monthly basis is currently a base case scenario and it is up to the length whether the EUR/USD would be able to rebound or it continues the slide.

Besides the amount there is also an issues if the ECB takes all the risk to its books or it will be shared between the national central banks. Taking into the account Mario Draghi's policy there is a higher probability that the ECB remains the only bond purchaser.

The SNB decision

In the morning Reuters wrote, citing an interview with Fritz Zurbruegg for the local press, that if central bank had decided to keep EUR/CHF floor at 1.20 then it would have to sell around 100 billion Swiss francs only in January. Currency reserve increase by 20% of the GDP only in one month seems to be really substantial amount.

Moreover Bloomberg also quoted interview with Zurbruegg for the Corriere del Ticino where the SNB member said that the decision was pushed by the “current events” and was not planned earlier. The central banker also claimed that in December “we were convinced” that the level of EUR/CHF rate “would be the main tool in our monetary policy”.

The Canadian Dollar

None of the economists surveyed by Bloomberg expected a rate cut by Bank of Canada. The monetary policy makers in Ottawa kept the benchmark for 5 years at 1%. However, according to the central bank statement the recent rapid oil prices fall, which would have a negative on growth and inflation caused that the monetary policy has been loosened.

The BoC concerns were also confirmed by economic projections included in the inflation report. Comparing to the October estimates both the GDP and inflation was reduced for Q3 2015 by 0.5 percentage point and 1 percentage point respectively. The Canadian authorities also assume a slight rebound on the crude oil (to 60 USD) but we may also expect that if the WTI slumps to 40 USD more easing may be on the horizon.

Investors on the loonie reacted nervously. During one “tick” the USD/CAD rose by 200 pips moving toward 5 year highs. Taking into the account more involvement from the monetary policy to speed up the inflation and keeping in mind the expected tightening by the FOMC it is pretty possible that the USD/CAD may jump toward 1.30 in the following months.

USD/CAD in the last 10 days

Wykres - kurs USD do CAD

Source: Bloomberg. The USD/CAD raise shows the weakening of the Canadian dollar against the American currency.

The foreign market in a few sentences.

All eyes are set to be focused on ECB today. The base case scenario is a 50 billion program on the monthly basis which is suppose to last for a year. If this conditions are met with not further suggestions that the purchase may be extended the EUR/USD should rebound by around 100 pips. On the other hand exceeding the consensus or fulfilling the Bloomberg leak should significantly weaken the euro, especially to the franc.

Industrial production, ECB. LIBOR CHF

Due to the better industrial production and rumors on QE the zloty gained some value yesterday. The GUS readings not only confirmed some rebound suggested by the PMI but also decreased the odds for interest cuts in March. As a result it was a positive signal for the zloty.

Demand for the PLN against the euro should also be generated for the two-year QE. The situation looks a bit different concerning the Swiss franc. More aggressive easing from the ECB may increase the downside pressure on the EUR/CHF. The euro-swiss slump can be larger than the EUR/PLN decline and resulting that the CHF/PLN can appreciation again.

But there are also good news. The LIBOR and FRA 3X6 has been falling further. It means that in three months the base interest rates used for the loans valuation may fall toward minus 1%. If the bank calculates the rates using market data we it should compensate by more than half higher installments caused by CHF/PLN appreciation.



Source: Bloomberg. The yeloow line shows the current LIBOR 3M. The yellow line shows the FRA 3x6 contract, which assumes, that the LIBOR 3M for three monthis will fall to the level of -1%.

Summarizing, the zloty in the afternoon may be unstable. The most volatility is expected on the CHF/PLN, which in case of uber dovish ECB may even retest 4.40. On the other hand the franc can significantly weaken if Draghi does deliver only minimal expectations. However, the base case scenario for the EUR/PLN is a fall below 4.30 level.

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

Range EUR/USD 1.1450-1.1550 1.1550-1.1650 1.1350-1.1450
Range EUR/PLN 4.3000-4.3400 4.3000-4.3400 4.3000-4.3400
Range USD/PLN 3.6900-3.7300 3.6700-3.7100 3.7100-3.7500
Range CHF/PLN 4.2800-4.3200 4.2800-4.3200 4.2800-4.3200

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

Range GBP/USD 1.5150-1.5250 1.5050-1.5150 1.5250-1.5350
Range GBP/PLN 5.6100-5.6500 5.5900-5.6300 5.6300-5.6700


22 Jan 2015 13:01|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:

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