Afternoon analysis 08.10.2015

, author:

Piotr Lonczak

The dollar gained before the Federal Reserve's minutes. Moreover, the labor market report supported the US currency. The European Central Bank needs more data before taking additional action. The zloty dropped as risk appetite weakened.

In the minutes of its latest meeting the European Central Bank confirmed the view presented recently by Mario Draghi. The Frankfurt-based institution is willing to expand its bond buying program. However, the ECB still needs more data to assess the outlook of the eurozone economy.

The major factor that may hurt the economy is the Chinese crisis and its impact on other emerging market economies. The latest reports from Germany showed, that the major eurozone economy is susceptible to external risk factors. After a streak of poor releases concerning the industry, today the report on international trade was very weak.

Export dropped at the highest pace since 2009. It declined 5.2 percent. It clearly missed the forecast. Moreover, import declined 3.1 percent. As a result, the nation's trade surplus dropped to 15.3 billion euros. The decline in trade turnover signals a broad slowdown in the economy.

Given the situation, the probability of additional actions of the ECB increased. More than two-thirds of respondents in a Bloomberg survey predicted the ECB’s will decide to expand the European QE before the end of the year. Currently, the Frankfurt-based institution is buying assets worth 60 billion euros on a monthly basis aimed to spur inflation (the goal is near 2 percent). However, in spite of the QE launched in March, in September inflation rates dropped to minus 0.1 percent after a brief rebound in the meantime.

Stronger dollar

The minutes of September Federal Reserve meeting will probably remind investors that the US central bank is going to hike this year. Although the Federal Open Market Committee refrained from rising rates, it is not very likely that the atmosphere was dovish. The majority of FOMC (13 members against 4) is willing to hike this year.

The Fed Chair Janet Yellen in late September said that her view is to raise rates in 2015. Other Fed members have presented a similar stance since then. San Francisco Fed President John Williams is scheduled to speak after the release of FOMC minutes. His latest remarks have supported the case for tightening.

In addition, the dollar was helped by the labor market data. The number of unemployment claims dropped to 263k. It was the lowest result in 42 years. The reading mitigated concerns regarding the labor market that were sparked by the report on employment change. As a result, the probability of hike increased, which supported the dollar.

Also the Bank of England showed minutes from its latest meeting. The British monetary authorities consider the economy resilient against the global concerns. However, the BOE is not going to hike very soon as the inflation rate remains suppressed. The votes in the MPC did not change (8 against 1). As a result, the pound dropped today.

Zloty pressured

The Polish currency posted a weak session. Although the scale of the move was not significant, the zloty is recently performing worse than other emerging market currencies. The rebound in commodity currencies was spurred on by the rising oil price.

However, the threat to the zloty and other risk currencies is the Federal Reserve. If the FOMC's minutes and speech of John Williams confirm the tightening scenario, the risk assets will drop.

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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