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Afternoon analysis 05.11.2014

, author:

Piotr Lonczak

The zloty rose on swing after unexpected move from the Monetary Policy Council. The US labor market data above forecast before payrolls numbers. The attention shifts to the ECB meeting.

Tomorrow the European Central Bank will announce decision on interest rates. Any change of monetary policy parameters in not anticipated but Mario Draghi's press conference is going to be very interesting.

First of all, Reuters informed on growing discrepancies among the European Central Bank policymakers on the communication of goals. In September the ECB President Mario Draghi said that he sees the central bank balance sheet at 2012 levels, what needs an expansion of its holdings by about one trillion euro to accomplish. However, allegedly the goal was not established by Governing Council, as Reuters said. Thus, policymakers are angry on Draghi that he unveiled the goal that was not agreed.

The second issue is another rumour that the ECB considers whether to buy corporate bonds. Two weeks ago Reuters informed that the central bank weights up whether to buy firms debt to fulfill its commitment to expand balance sheet by on trillion euro. Nevertheless, today we even don't know whether this goal is valid as a reference point for the ECB interventions.

To sum up, the latest news concerning the ECB showed a vague picture. Given the divergence in the Governing Council the outlook for full quantitative easing is deteriorating. However, a lack of government bond purchases won't lead to strengthening of the euro due to stalemate of the institutional framework of the euro zone, that poses additional risk to the economy.

In the meantime, the US labor market data was again very positive. The ADP report showed an increase of employment by 230k in October – above than 220k expected and more than 225k (after revision form 213k.) in the previous moth. Today's data is view as a proxy for Friday's data from Department of Labor. According to expectations, non-farm sector add 232k in employment in October, after 248k in the previous month.

If the data meets expectations, it will push the dollar higher as the hawkish part of the Federal Reserve gains additional arguments for tightening of the policy. The case for a stronger dollar was also strengthened by voting results in the United States that gave a lead in the Congress to Republicans.

Other today's data – the Markit US Service PMI and Markit US Composite PMI were in line with expectations. The indices reflected the strength of the momentum of the US economy. The ISM non-manufacturing Composite index was also in line with expectations, reassuring the economy's momentum.

The zloty rose as the MPC surprised

The Monetary Policy Council left rates on hold. It was a big surprise as the expectations were for a 25 basis points cut and some analysts expected a cut by 50 basis points. The zloty rose after the decision was announced, but later it gave away its gains and hover near two-years low against the dollar. The EUR/PLN remained above 4.23.

Press conference after the MPC decision didn't give a clear view on the outlook for rates. The MPC stressed the significance of the GDP growth, but given the lowered forecast from the NBP it is unclear, why the MPC didn't cut rates. Moreover, a vague outlook for the inflation grow also gave a reason for cuts. The NBP president said that inflation will only near to corridor (one percentage point from goal of 2.5 percent), but not near to the goal itself.

Given an unclear message from the MCP, the outlook for interest rates is rather vague. Thus, this factor will be probably less important for the zloty in the near future. As a result, the zloty will be influenced by trends in the broad market.


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 Cinkciarz.pl Sp. z o.o is prohibited.

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