Daily analysis 23.02.2016

Weak Ifo readings from German economy increase odds for the ECB actions in March. The IEA on oil market. The pound remains under a strong pressure. The złoty remains stable to the euro, but Brexit may also be a negative for the Polish currency.

• 16.00: Existing home sales from the US (survey: 5.32 million).
• 16.00: Conference Board consumer confidence index (survey: 97.2 points).

Another argument for the Draghi

Weak German Ifo readings are in line with a set of disappointing publications from the whole euro zone. They are also confirming the view that the slowdown in EM or commodities exporting countries, may quickly translate to slowdown of Europe's largest economy.

The Ifo, which combines the current and expected condition of business in Germany, dropped to a one-year low to 105.7 points while expectations were at 106.8. A significant fall was recorded on the expectations of the subindex. It dropped to the lowest points since December 2012.

According to the Institute survey, manufacturing is expected to be under a significant pressure. Business expectations “declined steeply marking their largest downswing since November 2008,” the Ifo claims. Taking into the account previous weak readings from the euro zone (PMI, GDP, industrial production), the data from Germany is increasing the odds for more aggressive monetary loosening.

It may also decrease the probability for gains on the EUR/USD in the coming days, even if the global sentiment deteriorates further. Moreover, if the stocks turn toward gains, the expected slide can be deeper than previously anticipated.

The IEA on crude oil

The impact on the currency market, coming from commodities, should be much more visible due to fears on decreasing demand rather than increasing supply. However, it is often hard to distinguish which reason is really behind the moves. As a result reports from the IEA or EIA might bring stronger volatility on oil.

Yesterday the IEA (International Energy Agency) confirmed a scenario that the oil surplus should remain at average level of 1.1 million barrels/day in 2016. The agency also claims that, “unless we see an even larger then expected fall in non-OPEC oil production in 2016, and/or a major demand growth spurt, it is hard to see oil prices recovering significantly in the short term from the low prevailing at the time of publication of this report.”

Low oil prices were also suggested on Monday by the secretary general of OPEC. Abdalla Salem El Bardi said during the IHS CERAWeek meeting in Houston that, “Any increase in price will immediately return and cover any reduction.”

The comments do not cross out the earlier scenario regarding a production freeze by major exporters, which may push the prices higher. On the other hand, however, if the expected agreement between Russia and OPEC fail to materialize it might push both the WTI and Brent significantly lower due to unfulfilled expectations.

The pound remains under pressure

The GBP/USD stays under a significant pressure and the rebound after yesterday's slide is fairly muted. Following negative comments from Moody's, Fitch Ratings noted that downside risks for the UK economy also remain.

The rating agency claims that Brexit is “a possibility but not a base case” scenario. However, if it happens, “it would drive short term disruptions, and long term risks.” It would also hurt business confidence and curtail investments, according to the Fitch.

Overall the pound condition should be mainly dependent on the incoming surveys, especially after London mayor Boris Johnson decided to campaign in favor of Brexit. If the polls turn out to be inconclusive, the pressure on the pound may rise and the moves, especially to the dollar, may get more and more volatile heading toward the referendum.

The zloty is stable but can be under pressure from Brexit

The zloty remains fairly stable around midday hours. Stronger changes are not observed on the Hungarian forint which confirms the neutral approach toward our region today. However, it is worth noting that the PLN can also be under pressure due to the Brexit subject.

If the polls turn out to be inconclusive, there might be more and more analyses that Brexit may also increase decomposition of the EU. Such analyses can also be regarded negatively by investors involved in Polish assets, especially considering that nervousness is still present on the bonds after the most recent rating cut by the S&P. A negative impact may be seen especially on the Polish zloty to the dollar.

However, in the following weeks, the earlier impulses should be generated from the ECB. If the euro zone MPC makers decide to cut the rates and increase the asset purchase operation, there are quite high odds that the EUR/PLN may drop toward 4.30-4.35 range.