Afternoon analysis 10.11.2014

, author:

Piotr Lonczak

The EUR/USD on a swing after mixed data from the US labor market and the European investors' sentiment improved. The zloty up due to hawkish commentaries from the MPC. The Bank of Russia supported the rouble.

Friday's data from the US labor market was below expectation, but a more profound analysis unveils a quite good landscape (a broader view in our morning commentary). Notwithstanding, the most important issue is the EUR/USD rose since the data was released.

Apparently, investors are more picky with respect to the labor market reports. This kind of approach is rather wrong as the Federal Reserve is not likely to change its plans on interest rates hikes due to few lower than expected readings.

The Fed will not change its plans when seeing falling rate of unemployment, rising employment in a pace above 200k (last seen in mid 90's) and when other key reports show solid momentum. Reuters said that primary dealers expect first interest rates rise before June 2015.

Given current circumstances, the prospect of a rising EUR/USD is not very plausible. In addition, one must remember that the European Central Bank vowed to intensify its effort to spur growth and ward off deflation. The ECB president Mario Draghi said there are no disputes among policymakers and the use of other unorthodox measures is possible (implying full quantitative easign that encompasses government bonds).

Today, with an almost empty economic calendar, the EUR/USD posted some gains as the investors' sentiment improved. The Sentix index rose to minus 11.9 points from 13.7 points, more than minus 13.5 points expected.

After the release of the Sentix gauge the EUR/USD rose. Later it gave away its gains, as the overall sentiment against the shared currency deteriorated.

The rouble slide tamed

Comments from the Bank of Russia tamed a rouble slide. The central bank president Elvira Nabiullina said she considers recent drop as too extensive and the monetary authorities will curtail liquidity provisions as it was used to speculate in the currency market.

Earlier the central bank increased interest rates and changed its intervention model to unannounced moves to increase risk for investors focused on speculation. The Bank of Russia sees its latest effort as providing significant support for the rouble by curbing the drop of the currency by 10 percent.

Moreover, the rouble got support from today's news that Russia and China made an agreement on gas supplies that is worth near 400 billion dollar as the previous deal signed just after the seizure of the Crimea Peninsula. The currency is also supported by rising oil prices. The Bank of Russia cut its growth forecast to zero in 2015 and to only 0.1 percent in 2016. The forecast assumed the presence of western sanctions until 2017 and the oil price averaging at 95 dollars in 2015. Although the prospect for sanctions is plausible, the forecast for the oil price is somewhat optimistic.

The zloty was strengthened

The Monetary Policy Council didn't cut the interest rates as expected. Moreover, the NBP president Marek Belka was not pleased and gave a vague outlook for the monetary policy. That given, the zloty didn't exploit this factor to rise as it should.

Nevertheless, today's comments from the MPC provided some clarity as Elżbieta Chojna-Duch said the MPC should hoard bigger cuts for a more significant slowdown (a weak PMI or GDP reading). In addition, a hawkish MPC member Andrzej Głapiński said there is no room for additional cuts.

All in all, the prospect for more interest rates cut is getting less plausible. Given that, the zloty may rise in the short term and in the longer term the Polish currency will be less susceptible from the risk-aversion jumps.

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.

Return to the main list

See also: