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Afternoon analysis 06.11.2014

, author:

Piotr Lonczak

The euro plunge after Draghi. Data from Germany point at stagnation. The OECD push on the euro zone countries to spur growth. The zloty under influence from developments in the broad market.

The Organisation for Economic Cooperation and Development urged the euro zone countries to increase efforts to spur growth. The OECD said a drop of austerity policies may be needed to achieve better economic performance. Especially Germany is pushed to increase investment spending as Berlin currently faces a period of lower growth.

The organisation warned if the euro zone countries fail to rekindle the economic growth, the monetary union will face a prolonged period of stagnation. Moreover, the OECD said that due to the growing divergence among the major central banks the risk of heightened volatility is quite significant as investors rebuild their investment portfolios.

Today's data from Germany was somewhat poor. After some relief provided by PMI reports that showed a slight improvement of economic condition, the industrial orders report was below expectations. The reading was a 0.8 percent growth, lower than 2.3 percent projected by analysts.

Tomorrow data on industrial production is scheduled. If the report also fails to meet expectations, it will be a huge disappointment. The German economy is afflicted by poor performance of the euro zone and sanctions against Russia over the Ukrainian crisis. Today Berlin warned that additional restriction on Russia may be imposed as Moscow violates the Minsk agreement.

The ECB more dovish

As expected, the European Central Bank left interest rates unchanged at record low level. The main refinancing rate remained at 0.05 percent and deposit rate at minus 0.2 percent. The ECB conducts asset purchases according to previously unveiled plan.

As usual, a more interesting part was a press conference of the president Mario Draghi. The ECB chief showed a dovish stance of the central bank by reaffirming a goal of the balance sheet expansion to level form the beginning of 2012 (expansion by one trillion euro). The target was expressed in the ECB official statement. Later Draghi nuanced that the reference is march 2012 (the balance sheet was at 3 trillion euro then).

The ECB president stressed the unanimity of the Governing Council by saying that the statement was signed by every member of this body. In this manner he challenged the allegations from Reuters that wrote about a growing divergence among the ECB and critic of Draghi's way of communication.

What is very important, Draghi reaffirmed of a readiness of the ECB to use additional tools to ward off deflation risk and spur growth. Implicitly, this statement was about the outlook for full quantitative easing, that was not excluded eventually. When asked about corporate bonds purchases, Draghi said that there was a discussion on asset purchases in general but not about certain securities classes.

To sum up, today's ECB conference was very dovish. Draghi challenged the speculations that the Governing Council is divided in effective manner. Thus, the door to full QE are left open.

Given the dovish view presented by Draghi, the euro was pushed down. The EUR/USD touched 1.2402 – the lowest level in two years.

The zloty under influence of the broad market

Thursday's decision from the Monetary Policy Council to not to change the interest rates was a huge surprise (it was expected to cut rates by 25 basis points). After the decision was announced, the zloty rose briefly against its major pairs, but later it dropped again.

A dovish stance of the ECB increases the divergence between major central banks. That paves the way for the dollar to new highs against the euro and other currencies. Given current circumstances, the zloty's developments will be determined by the situation in the broad markets. So the Polish currency will weaken against the dollar and stabilize to the euro at low level. Today the USD/PLN touched 3.40 for the first time since July 2012.


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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