Afternoon analysis 10.03.2016

, Autor:

Piotr Lonczak

The European Central Bank met the market expectations. Volatility spike in the EUR/USD. The zloty gained against its major pairs.

The ECB increased stimulus more than it was expected. Before the meeting the market expectations were for 10 basis points cut of deposit rate and increasing level of asset purchases by 15 billion euros. There were some rumors the ECB may buy corporate bonds, but it was considered not very likely.

Eventually, the Frankfurt­based institution provided more decisive measures. As expected, the ECB cut deposit rate by 10 basis points, but it also lowered refinancing rate by 5 basis points to 0 percent and lending rate by 5 basis points to 0.25 percent.

The monetary authorities decided also to increase level of asset purchases more than it was expected. It was lifted to 80 billion euros from 60 billion euros. Moreover, the ECB widened the scope of eligible assets. It will now include corporate bonds. And finally, the ECB announced four additional TLTRO auctions starting June 2016. Banks will borrow money at refinancing rate and institutions that will meet certain conditions will be allowed to borrow at lower cost.

The ECB's decision was mainly based on the expected deterioration of economic conditions. The GDP forecast for 2016 was cut to 1.4 percent from 1.7 percent expected in December. The inflation forecast was cut to 0.1 percent against 1 percent earlier.

The ECB actions hit the euro. But later the common currency recouped losses. Today's range of the EUR/USD was 1.0820­1.1115.

In the longer term the ECB's actions will likely support risk taking in the markets. This factor may help commodity markets. Recently commodities were supported by the Chinese government's plan to support the GDP growth. A broad improvement of the market sentiment may support the emerging market currencies, including the zloty.

Now the Fed

The Federal Reserve will release decision on the monetary policy in the next week. The US central bank is expected to lower the pace of tightening. In December after the initial interest rate hike the expectations were for four increases in 2016. However, according to the futures market next interest rate hike is expected in September.

If the Fed eases its stance, all major central banks will be more dovish that it was expected at the beginning of the year. As a result, the market sentiment should be rather positive.

A stronger zloty

On Friday the MPC will decide on interest rates. It is expected to leave rates unchanged. Currently the main rate is at 1.50 percent. It is the lowest level on record.

Nevertheless, a more important issue will be the stance of the MPC. If the monetary authorities are rather hawkish, there zloty may gain. Given the latest speeches of the MPC members, a similar scenario is likely.

Given the ECB's actions and expectations for a more dovish Fed stance, the zloty may gain further, especially against the euro.

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