Afternoon analysis 03.06.2015

, author:

Marcin Lipka

Comments from Mario Draghi brought significant swings on the debt market and gave some boost to the euro. Readings from the US haven't given clear sign to the next week Federal Reserve decision. Belka on causes behind the zloty weakness.

ECB's meeting and debt market

The European Central Bank (ECB), in line with expectations, didn't change and primary parameters of the monetary policy. No surprise was seen regarding the economic projections which mostly matched March expectations.

Few hints concerning Greece were presented. The ECB wants to keep Hellenic Republic inside the euro zone, but Mario Draghi didn't want to elaborate more. The central bank chief confirmed to keep asset purchases until 2016 and no discussions regarding earlier conclusion of the program were presented today.

However, there was a statement which spurred high degree of volatility on debt market. It also translated to large EUR/USD appreciation during the conference. It all happened after question regarding fixed income turmoil was asked.

The ECB chief described the issue in great details. In his opinion the yield rise in Bunds was the effect of improving economy and higher inflation expectations. He mentioned also more market moving issues like one direction trading (most market participants predicted that yields would remain at low levels for long time due to QE program and no prices growth – author's note) and rapid closing of positions.

Draghi did also point out that rises in short term yields on German debt caused that this papers become eligible for QE purchase. As a result it caused that less buying were made on longer maturities.

Technical aspects of the market might have also impacted the market. Low liquidity in the time of higher volatility and selling pressure increases the nervousness of the participants who were expecting on higher prices (lower yields).

Draghi didn't want to say which reason was key for the market but his speculations on the subject caused a panic selling on Bunds. The 10-year benchmark yields rose 15 bps after his comments and topped the highest levels since October of 2014.

A significant move was also seen on the EUR/USD which rose 150 bps mainly due to lower spread between German and US bonds and worse perspective of carry trade. Additionally the market have been convinced for a long time that the spread would be widening due to increasing difference between US and euro zone interest rates.

It is quite probable that market behaviour of debt market and especially the yields on German bonds would be the main catalyst to the changes on EUR/USD. They may even bring more attention than issues regarding Greece or changes in the US monetary policy.

Foreign markets in a few sentences

Besides movements on the debt market there are issues concerning Greece and especially today's Tsipras-Juncker meeting which may give a hint how close the deal is. Readings from the US didn't give a clear signal concerning future Fed's decision. The ADP data was close to the consensus and the services ISM fell short of expectations but 55.7 number still looks quite bullish.

The following days might be mostly impacted by moves on the debt market, news from Greece and Friday's NFP data. Moreover on next Wednesday one of the most important Fed's meeting ends. It should give a clear answer whether the first interest rate hike is going to be in September or in December. This data might be key to the US dollar valuation.

Debt market puts pressure on the zloty

German yields increase was one of the main reason behind the zloty's depreciation during the afternoon trading. Lower spread between German and Polish debt reduces the attractiveness of carry trade and higher volatility increases risk of such strategy. It pushes some participants to close positions on the zloty and brings the PLN depreciation to the euro.

No impact on the zloty was seen from Marek Belka comments. His only remarks concerning the Polish currency came from answer regarding the most recent weakness. The MPC chief claimed that it is not the effect of changes on political scene but rather the result of Greece issues and expectations for interest rate hike in the US. Changes on the zloty due to bonds volatility were not discussed during the meeting.

Strong signal form the debt market may still cause significant volatility on currency. Usually such turmoil does not last long, but the zloty might be much more unstable in following days.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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