Afternoon analysis 28.10.2015

, Autor:

Marcin Lipka

The euro gained after comments from the ECB's Ardo Hansson. The dollar is waiting for the Federal Open Market Committee statement. The zloty limited the slide, but still remains at the low level.

On Wednesday, the most important event will be the Federal Open Market Committee statement after a two-day meeting. The latest reports from the US economy were rather mixed. However, it is hard to believe that the Federal Reserve is going to drop its plan to raise interest before the end of the year. This scenario has been communicated by the majority of the Fed's members including Chair Janet Yellen.

It is very likely that the Fed will leave door open to interest rate hike. A similar solution will support the dollar and it will negatively affect the emerging market currencies.

Stronger euro

In the last week European Central Bank President Mario Draghi announced re-examination of the quantitative easing program in December. It means that the Frankfurt-based institution is going to expand its bond buying program at the next meeting. However, today the market optimism faded as the outlook for the second European QE was disturbed.

Governing Council Member Ardo Hansson from Estonia said that he sees no need to rapidly expand stimulus. His remarks were in contrast with comments of other ECB members within past 24 hours as Peter Praet and Benoit Coeure presented rather dovish stance.

The situation shows that the way leading to expansion of the QE will be more difficult than it was previously believed. The major obstacle will be the German Bundesbank, which is widely known as severe critic of monetary easing. Given the situation, the euro increased.

The Riksbank has been the first bank to respond to the ECB's stimulation plan. Today, the Swedish central bank increased its bond buying program by 65 billion crowns to 200 billion crowns. The Swedish monetary authorities left the credit cost unchanged at record low minus 0.35 percent.

The Riksbank published new forecasts. Inflation is expected at 0 percent this year (unchanged from the prior forecast). However, inflation prediction for next years was cut (to 1.4 percent in 2016 and 2.4 percent in 2017). The GDP growth is expected at 2.3 percent this year and 3.3 percent in the next year.

The krona went up after the decision was released. However, it was surprising given the fact that more dovish policy should have weakened the currency. And the monetary authorities probably have expected and opposite reaction.

Weak zloty

After slide due to political risk, the zloty remained at the low level. All three major rating agencies - S&P, Moody's and Fitch - have negatively assessed the economic proposals of the next government. As a result, it poses a threat to Poland's rating. It is negative factor for the Polish bonds.

Moreover, comments from the winning party are not helping. Although the idea of using central bank to finance 350 billion zlotys investment program will be probably dropped, other social proposal are still actual.

Given the situation, the zloty was trying to recoup some losses against the dollar and the pound. The Polish currency dropped against the euro and the franc. The risk associated with the FOMC statement limits the probability of a stronger zloty's rebound.

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