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Daily analysis 14.01.2015

, Autor:

Marcin Lipka

New 9-year-low of EUR/USD after the decisions on the OMT and the new comments of EBC members. World Bank's projections. Zloty slightly weakens on the wave of increase of aversion towards risk. Afternoon's summit of MPC and Belka's comment in National Economic Chamber.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • Probably between 12.00 CET and 14.00 CET: The decision on the interest rates in Poland. 34 out of 35 economists surveyed by Bloomberg assumes that the rates will remain at the level of 2.0%.
  • 14.30 CET: Retail sale in USA for December (estimations: minus 0.1% m/m, with exclusion of cars and fuels +0.5%).
  • 16.00 CET: Press conference of Marek Belka after the summit of Monetary Policy Council.

Further drop pressure on EUR/USD

The less time is remaining to EBC summit planned for January 22nd, the fewer data showing that increase of current assets purchase by government or corporation bonds is becoming a base case scenario reaches the market.

In his interview for the MNI news agency, Ignazio Visco claimed that “we are considering a wide spectrum of asset purchases, but of course the market of government debt instruments is most fluent and deep, which in result makes this class of assets crucial for reaching our goals”. The Italian member of EBC also thinks, that “there is a macroeconomic risk of entering a spiral of stagnation and low inflation or deflation”. What is interesting, so far EBC along with Mario Draghi did not assume a real danger of inflation. That is why Visco's statements are quite a strong argument, that full QE will be introduced in the euro zone rather next week, than in March. It will include not only the government instruments, but also corporation bonds.

In an interview for 'Die Zeit', Mario Draghi seemed to be more reserved. The chief of EBC claims, that “all members of European Central Bank are determined to fulfil our mandate”, but there are differences between some of them. Also, Draghi referred directly to Germany's veto against purchasing the treasury bonds, by saying that “EBC conducts a monetary policy for 19 countries, not only for one”. It only confirms repeatedly signalized fact, that even with Berlin's veto, quantitative easing will be increased.

Pressure on the euro has also been increased, after the opinion of Advocate General of Court of Justice of European Union, about OMT program. In his initial opinion Pedro Crus Villalon stated, that the OMT, assuming among others purchase of bonds by EBC, is “actually coherent” with the European law. Despite, that the announced decision was not bonding for the monetary authorities, it is however another element that makes QE easier for Draghi.

Sum of negative information for the European currency caused, that EUR/USD to drop to the new 9-year-low before noon. The level of 1.1730 is at the same time only 90 pips above the minimums recorded at the end of 2005. Thus, if we will go down to the areas of 1.1640, the main currency pair will achieve 11-years old pits.


Chart of EUR/USD within recent 15 years

Chart Source: Bloomberg. The EUR/USD fall means the European currency's weakening in against the dollar.

New projections of World Bank

In June the World Bank assumed, that this year the global GDP will increase by +3.4%. Now this institution expects it to be a +3.0% increase, which despite the downward review is still by 0.4% more than in 2014. The economists from Washington D.C. think, that United Kingdom and USA are in the best condition among the developed countries. Their economic growth will amount respectively +2.9% and +3.2%. On the opposite side are the euro zone and Japan, where the expected increase I only approximately +1%.

The World Bank also underlines, that the current projections are endangered by a downward review. Mainly due to the weaker increase of foreign commerce, disturbance on the markets caused by the differences in monetary policies of main economies, and maintaining period of stagnation or deflation in the euro zone and Japan.

On the other hand, the main chance for global economy is, according to World Bank, the decrease of oil prices. It will cause a movement of income from the countries exporting this main energetic resource, to the countries that import it.

In the context of currency market, the WB report confirms the maintaining power of the American dollar, in relation to euro or yen. It also favours the maintenance of drop trends on resource currencies.

The foreign market in a few sentences

There are still no signals to generate a bigger correction on EUR/USD. Thus, the European currency should remain under pressure, and it is not excluded, that before EBC summit planned for January 22nd, we will observe the new 11-years old minimums in the areas of 1.1640.

Decision of MPC and Belka's statements

Only one out of 35 economists surveyed by Bloomberg agency sees the interest rates cut coming on today's summit. Considering the Council's personnel and the recent statements of its crucial members, the national monetary authorities will really decide to leave the costs of credit on unchanged level.

Assuming that the market evaluates the current consensus quite well, the investors will concentrate on Council's suggestions about the possibility of the interest rates cut on the upcoming summits. Especially in March, when we will receive the new inflation's projection, prepared by NBP. In this context, a good tip will be MPC judgement of current economic situation, and its view about the influence of prepared increase of quantitative easing by EBC.

Marek Belka revealed some information on that issue during his today's appearance in National Economic Chamber. He said, that the national interest rates cannot be too high in relation to our neighbours, because it may lead to the inflow of a short term capital, that could enforce zloty. However, it will be interesting, will Belka be able to convince the rest of the council to his views. Let us remind you, that in November the chairman voted for the decrease by 50 base points, while MPC left the interest rates unchanged.

In conclusion, the more dovish Council's summit will be, the bigger probability that euro will increase up to 4.30 in the afternoon. On the other hand, if the statement, as well as the conference will show, that there is a consensus for maintaining the money rates on current level throughout the upcoming months, we should see the drop of EUR/PLN, even in the limits of 4.27.

Expected levels of PLN according to the EUR/USD rate:

Rate EUR/USD 1.1750-1.1850 1.1650-1.1750 1.1850-1.1950
Rate EUR/PLN 4.2600-4.3000 4.2600-4.3000 4.2600-4.3000
Rate USD/PLN 3.6100-3.6500 3.6300-3.6700 3.5900-3.6300
Rate CHF/PLN 3.5400-3.5800 3.5400-3.5800 3.5400-3.5800

Expected GBP/PLN levels according to the GBP/PLN rate:

Rate GBP/USD 1.5150-1.5250 1.5050-1.5150 1.5250-1.5350
Rate GBP/PLN 5.5100-5.5500 5.4900-5.5300 5.5300-5.5700

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