Afternoon analysis 04.02.2015:
The Monetary Policy Council left the rates unchanged at record lows. The decision resulted in a stronger zloty. China cut the credit cost to boost the economy. The US report from labor market without influence in the market.
The PMI reports from the euro zone released two days before were rather poor. However, today's reports from service sector were clearly better. Generally all reports signaled improvement, what showed that the economic environment in the monetary union is getting better.
Moreover, data on retail sales in the euro zone exceeded expectations. Eurostat said that it rose 0.3 percent – a clearly better result than projected drop. In addition, the data form preceding period were revised up. Although today's reports have usually a marginal influence in the market, they signal that the economy is getting better and it is broad based. Earlier Eurostat said that unemployment dropped to 11.4 percent from 11.5 percent.
What is important, today's report don't reflect fully the impact of the European Central Bank decision to introduce government bond purchases earlier in January. Thus, the improvement had taken place before the ECB introduced new measures. As a result, quantitative easing will facilitate expansion that began before its inception.
Auction of Greek bonds revealed mounting problems with financing accessibility for Syriza government. Today's cover ration stood at 1.3 – the lowest level in eight years. Moreover, the country experienced increase of yields since previous auction.
Greece has to face problems caused by outflow of deposits from banking system. Greeks took their money from accounts due to threat that new government will nationalize banking system. The overall scale of the problem was bigger than in 2012 when the country was close to leaving euro zone. This negatively affected the banking system capacity to finance government.
The Syriza government eased its stance as the financial markets were hit by anxiety caused by party's economic program. The authorities dropped their proposal for debt write down in an exchange for seeking compromise with its European partners. One proposal is to extend maturity of Greek debts. However, even if Syriza manages with its European problems, its domestic problems are also very severe.
For now this factor has been marginalized, but its negative potential is quite large. The EUR/USD was rather calm in above 1.14.
China cut rates
People's Bank of China cut interest rates to help the economy. The monetary authorities lowered deposit rate by 50 basis points to 19.50 percent to provide more liquidity in the financial system and boost credit action as the economy falters.
Recently, the reports from China were rather gloomy. PMI reports showed deterioration in Chinese industry. Moreover, the GDP growth slowed to 7.4 percent – less than 7.5 percent government target. This factor is improving risk appetites in the markets.
The US labor market data was in line with expectations. The ADP said that companies added 213k in employment – slightly less that projected. In turn, the number for previous month was revised up. The impact of this reported was limited. However, the major labor market data is due on Friday as the Labor Department reveals its monthly report on employment situation. This release is of major importance for the Fed, but even if it misses projection, the central bank will pursue its plan to rise rates in mid 2015.
Stronger zloty after MPC
As expected, the Monetary Policy Council left interest rates unchanged at record lows. The zloty strengthened after decision was released. Currently, the Polish currency is in a good position to extend gains, as the country with high rates and deflation what is coupled with solid growth and low debt lures capital. The MPC at a press conference suggested that the rates will be cut in March by more than 50 basis points.
The Polish currency will continue to rise if market conditions are favorable. Limited impact of Ukrainian crisis and Greek turmoil in the broad market creates opportunity for the zloty.
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