Afternoon analysis 03.09.2015:
A significantly more dovish message from the ECB generates strong selling pressure on the European currency. Will the revision of macro data in Europe impact the Fed's decision? The zloty is markedly stronger to the euro after Draghi's conference but the slide below 4.20 is a low probability event.
Dovish from Frankfurt
The ECB conference was much more dovish than expected today. It is a result of the following announcements. Firstly, the ECB may buy even 33% of bonds of each issue whereas earlier it was 25%. It theoretically opens the door to increase/lengthen the QE operation despite Draghi claiming that such measures were not discussed today.
An important element was also the clear suggestions from the ECB that it is ready to extend the asset purchase program beyond September 2016 if the inflation fails to approach towards the central bank target. Additionally, the macroeconomic projections were revised downwards in the 3-year horizon. The most visible difference was observed for CPI in 2016 which was lowered from 1.5% to 1.1% comparing to the June estimates.
In the announcement there was a statement that the risks for the European economy “remain on the downside, reflecting in particular the heightened uncertainty related to the external environment”. Draghi didn't want to comment on the Chinese situation claiming that it will be discussed during the G20 meeting in Turkey scheduled for this weekend.
Overall a pessimistic and dovish tone was surprising especially when taking into account the calm comments from the central bank officials in Jackson Hole. However, if the markets begin to believe that the ECB extends the QE in the eurozone the main currency pair can quickly slide below 1.10.
What will the Fed decide?
A real question mark is the current approach from the Fed. On one hand, we had quite calm comments during the Jackson Hole event, and on the other today's pessimistic view from the ECB both on the European and EM economies.
Will the Fed make any plan changes regarding this issue? If yes, how important will it be for their interest rate policy and whether the Federal Reserve will decide to hike the benchmark this year? On the other hand, if Yellen fails to raise interest rates by December it may create more turmoil especially that the Fed have been preparing for this decision for many quarters. Finally, it is possible that the US will hike once this year and wait at least a 6-month-period.
Currencies from our region should be, traditionally, beneficiaries from today's ECB message. It is clearly seen on the EUR/PLN which dropped to 4.20. Additionally, if Draghi's actions push back the interest rate hike in the US the zloty should gain more value.
There is also another interesting issue. Comparing Belka's comments after the Polish MPC meeting on Wednesday and his ECB counterpart view presented today, the messages were quite different. Our central bankers almost dismissed all threats from the EM turmoil while the policy makers in Frankfurt were mainly concerned by the negatives created in developing economies. In the short term it should also be a positive message for the zloty. In the medium horizon, however, if the ECB is correct, the Polish MPC will have to “catch up” with the monetary trend and cut interest rates which should push the PLN lower.
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