Daily analysis 26.10.2015

Solid German business confidence index was not enough to generate a significant rebound on the euro. Standard&Poor's on the possibility of a Polish perspective rating cut. The zloty's performance assume the most probable outcome in Poland and around the world.

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

• No major macroeconomic data which may significantly affect the analysed currency pairs.

Solid Ifo, but with no major impact on the euro

Some pessimistic calls regarding the German economy have not been fulfilled yet. The Ifo index stayed at a solid level, above 108 points. Additionally, the subindex measuring the future condition of 7,000 German businesses rose to the highest level in more than a year and topped 103.8 points.

Theoretically, it is a positive message for the euro. However, taking into account the comments regarding more QE in the eurozone and even some suggestions on lowering the deposit rate should still weight on the EUR/USD and generate significant problems in pushing any rebound.

As a result, regardless of the incoming data, the euro is expected to remain under pressure. Moreover, the EUR/USD may also be affected by signals from the Federal Reserve, which conclude its October meeting on Wednesday. No significant deterioration in the description of the economy may suggest that the Fed still supports the interest rate hike this year. It would be another strong selling signal for the EUR/USD.

Election effect on the zloty

The foreign press follows the Polish election closely. The overall message is negative and suggests that our country is expected to be ruled by a populist and nationalistic party. On the other hand, it is worth noting that even more respectable news sources are sometimes prone to exaggerating some issues. Additionally, sometimes they build their views on election promises. However, if we assume that most of the social spending will not be fulfilled, and the budget deficit stays below the 3% target, there would be less fears on the fiscal discipline and this issue fails to weigh on the Polish currency.

A much more dangerous issue is the comments from the leading rating agency. Standard&Poor's writes that some changes presented by Law&Justice may “dampen investor confidence, which in turn could create a drag on Poland's strong economic performance of late”. The S&P also notes that “we could revise the outlook to stable, if we saw reversal regarding fiscal consolidation, macroeconomic management, or monetary policy”. On the other hand, a swift reaction from the S&P could be viewed as a positive sign as it can serve as a good excuse for the new administration to withdraw from the most costly promises and focus on the fundamental issues of the country.

In our view, if Law&Justice gets the majority of seats in the Polish lower house of parliament, it would be a more preferable scenario for the zloty than unstable coalition, the risk of another campaign with another unknown outcome. As a result, we do not expect the EUR/PLN to rise above the 4.30 level, if the government withdraws from most of the promises and the budget revision will not exceed the 3% of the GDP deficit.

Other central banks after the ECB message

Further monetary easing from the ECB will be a real challenge for the SNB. The ECB initial QE operation pushed the Swiss MPC to quit the peg on EUR/CHF. In the recent hours, the euro-franc pair remained fairly stable taking into account the slump on the euro. However, if Draghi keeps exceeding expectations on the monetary policy, it may be enough for the SNB to lessen the will to weaken the CHF. If it brings more speculators on board, the EUR/CHF could even be pushed towards parity.

Regarding the Fed, the ECB action seems to be neutral. The FOMC participants are still expecting dollar appreciation, so this should not be a surprise. Additionally, an easier monetary policy in the eurozone should improve the global sentiment and make the hike easier. This aspect should keep pressure on the EUR/USD.

Scenarios in the following months

Much more volatility may be seen in the first month of 2016. We assume that the new MPC will be more dovish than the current Committee and is expected to cut the interest rate by 50 bps. This move should not significantly affect the EUR/PLN pair because it would coincide with more easing from the eurozone.

Aggressive easing from the ECB may, however, adversely affect the stability of EUR/CHF pair. It is possible that if Mario Draghi continues to exceed expectations, the SNB may fail to keep the EUR/CHF in the 1.08-1.10 range. As a result, if the euro-franc falls below the 1.05 level, it would guarantee CHF/PLN to rise to a 4.05-4.10 range.

More turmoil can also be expected from the mix of monetary policy from Polish MPC, the ECB and the Fed for the dollar. Keeping the EUR/PLN rate in the 4.20-4.30 range does not mean that the USD/PLN also remains stable. If Draghi exceeds expectations and the FOMC starts monetary tightening either in December or in March 2016, then within the following months the appreciation of the US dollar may push the EUR/USD even towards the 1.00-1.05 range. It would mean that the dollar may even rise towards 4.10-4.20 PLN.

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

Anticipated GBP/PLN levels according to the GBP/USD rate: