Daily analysis 02.10.2014:
Slightly weaker data from the US generated a correction on dollar pairs. ECB's turmoil. How much is Draghi going to buy? The Polish currency remains fairly stable and the euro area decision should not generate major volatility on the local market.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 13.45 CET: ECB rate decision (survey: deposit rate at minus 0.2%, reference rate at 0.05%.
- 14.30 CET: Mario Draghi conference after the ECB rate decision.
- 14.30 CET: Weekly jobless claims in the US (survey 297k).
ISM. ECB decision
The dollar supporters got scared a bit after weaker than anticipated ISM reading from the US. The managers' manufacturing index dropped to 56.6 level from 59 recorded in August markedly below the line expected by the market (58.5 points). These are not dire numbers, especially if we compare them to the rest of the world. But a significant slide of the employment subindex (from 58.1 to 54.6) combined with weak payrolls last month or low inflation readings may give some arguments to the neutral/dovish FOMC camp. As a result, the EUR/USD generated a rebound which pushed the most heavily traded pair to mid 1.26 range. The “greenback” correction was also translated to a sizable moves on “kiwi” and the yen.
However, in the afternoon we all will forget about the impulses from across the pond and focus on the comments from Naples where Mario Draghi is scheduled run his conference. The ECB chief has, as usually, one task: on one side not to disappoint the market expectations but on the other leave some spare resources in case of further trouble.
After the last month deposit rate cut to minus 0.2%, and the reference rate drop to 0.05% it is hard to expect any changes regarding the cost of credit. Investors would rather like to know how long the asset purchase will be conducted, what are going to the overall conditions and how much liquidity is supposed to be delivered.
During the last meeting Draghi said that the ECB will be buying ABS and covered bonds. The asset backed market has size, according to Bruegel Institute, around 250 billion euro (private and SME). Additionally, there is around 600 billion RMBS available (but only the current issuance may be purchased). It sums up to around 850 billion eligible instruments.
The ECB is also expected to buy covered bonds. According to the JPMorgan analysts cited by Bloomberg they are worth 791 billion euro. Theoretically the ECB is eligible to buy more than 1.5 trillion euro of assets. However, taking into the account the fact that the central bank will be able to purchase only instrument with high rating, the overall amount of available papers would be around 1 billion euro (according to Bruegel the rating at or above “A” has around 60% of instruments).
Draghi and his colleagues will not be able to buy all the assets available on market . Additionally, it is worth noting that the current securtized issuance is fairly slim so the operation may be rather long-lived as we also have to wait for the market to reactivate.
As a result, investors are very cautious regarding what is going to be the overall purchase operation. Firstly, the market focused on 500 billion which was the amount reviled by Reuters just minutes before the previous meeting. Further estimates were much lower.
The professional market participants surveyed by Reuters claimed on September 8th that the ECB will announce around 300 billion euro asset purchase. The survey was updated on September 29th and the expected amount dropped to 200 billion. Part of the market also assumes that no concrete purchase value is going to be announced and they focus on whether the peripheral assets would be eligible (the topic was covered in greater details in last commentary).
Somewhat murky expectations giving some difficulties to estimate what can be the market reaction. We may, however, assume that if the ECB decides to purchase +300 billion euro with some option to broaden the purchase it should push the EUR/USD below 1.26 mark. A relatively small operation (200-300 billion) would also be negative for the EUR, but strong commitment about more things which could be done remain possible within the mandate (having in mind the QE).
On the other hand, the rebound can be expected if the final amount is not announced and the peripheral contribution is not confirmed. As a result, we should expect the approach toward 1.27 on the EUR/USD.
Today's ECB decision may bring some attention to the local currency market but its impact should be pretty limited. If it turns out that Draghi moves toward more dovish stance, we can expect somewhat stronger zloty but the appreciation move should not exceed 4.16 per the euro.
Otherwise, if the future ECB actions are a bit foggy, we should expect some zloty's weakness but it should not move above 4.18 mark on the EUR/PLN. A relative calm session is also predicted on both USD/PLN and GBP/PLN. More stimulation from the ECB probably pushes the EUR/PLN lower but it will also be negative for the EUR/USD. As a result, both moves should be leveled off on the USD/PLN.
Summarizing, the ECB conference will be mainly neutral for the PLN pairs. Even in an extreme scenario the change should not exceed 1-2 zloty cents in either direction. In following days the zloty will mainly focus on the Polish MPC rate decision (with short break for Friday's payrolls).
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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