Afternoon analysis 09.02.2016

, Autor:

Piotr Lonczak

Risk aversion returned after unsuccessful rebound in the morning. Bundesbank President Jens Weidmann warned the inflation rate is going to increase later than it was expected. The zloty remained at the low level.

At the beginning of today's session there was some improvement in the market sentiment. However, in the second part of the day, risk aversion returned in the markets. The European markets dropped more than 2 percent. The US futures also declined. Their dropped more than 1 percent.

The German industry data sparked anxiety concerning future of the European economy. After weaker than expected numbers on orders in the last Friday, today the report on production missed the forecast. Moreover, yesterday's Sentix Index revealed rising problems of the German economy, which was considered the major growth engine of the eurozone.

Given the recent deterioration of the German data the expectations before the March meeting of the European Central Bank are getting more important. ECB President Mario Draghi has been constantly iterating the monetary authorities are ready to act if needed. As the German economy growth falters, the probability of inflation rebound is getting smaller.

The probability the ECB will act increased after remarks from Bundesbank President Jens Weidmann. He said that inflation is going to rebound later than it was expected. Although the overall economic situation deteriorated, the German central bank chief said the markets reaction is exaggerated. Moreover, Weidmann sees no risk of rapid deterioration of the economic situation in China.

Relatively dovish remarks made by the Bundesbank chief did not weaken the euro and did not improve the market sentiment. In contrast, yesterday Benoit Coeure from the ECB warned the monetary authorities will not act under pressure of financial markets. Eventually, the EUR/USD moved near 1.13 - the highest level since October 2015.

For the EUR/USD the major factor will be tomorrow's testimony of Janet Yellen in the Congress. If the Fed president cites risk to the economic and inflation outlook, the dollar may extend its losses.

Zloty at low level

Additional factors add to risk aversion. Record low commodity prices put the part of mining sector in the face of bankruptcy. This factor also hurts the oil-exporting countries. The banking sector faces losses on financing the mining industry projects. The backdrop is the Chinese slowdown.

Given the situation, the risky assets are under pressure. As a result, the zloty resumed losses after some rebound against the euro and the Swiss franc. The Polish currency exploited the weakness of the dollar and the pound, but remained at the low level.

In the short term probability of a stronger zloty is limited. The Polish currency will remain susceptible to risk aversion and will show tendency to drop further. In the longer term more dovish than expected stance of the ECB and the Fed may support the emerging market currencies.

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