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Afternoon analysis 16.10.2014

, author:

Piotr Lonczak

The European debt market is polarizing again. The frank at 16-month high and the euro at 7-month high against the zloty. Although the US economy is looking good, the Fed may defer the end of the QE.

Greece is disturbing investors. Today 10-year bond yield rose as high as 8.71 percent – the highest level since January. The sell-off has intensified in last few days.

It was sparked by the government's effort to leave a bailout. Greek authorities are willing to drop fiscal constrains imposed by the International Monetary Fund and the European Union. Their goal is to increase spending before general election probably due in 2015.

In addition, there are some problems with eligibility of the Greek banks in the European Central Bank's asset purchases scheme. The program depends on credit rating. In case of Greece and Cyprus, the grade is below acceptable level, but the EBC will allow theses countries to participate in program, if they remain in bailout. So, pursuing the case for dropping the bailout by Athens may result in cutting off Greek banks from the program, what will impede an effort to revamp their balance sheets.

Greek problems spread to other debt-burdened countries. Spain didn't meet its target during debt tender. Madrid has sold only 3.2 billion euros against the target of 3.5 billion. The Spanish 10-year bond yield rose above 2.40 percent from 2.12 percent on the previous close.

Conversely, the German debt is going in the different direction. The yield on 10-year bund fell to a record 0.717 percent. So, we are again observing the rising discrepancy between euro zone peripheral countries and core countries in the debt market.

The US data look good

Today's data from the United States is above expectations. The number of new unemployed dropped to 264k from 287k in the previous week. It was the lowest level in 14 years. It was also better than 290k estimated. The report confirmed strong momentum of the US labor market.

In addition, the industrial production growth was clearly better than estimated. It rose 1 percent on a monthly basis against 0.4 percent expected. All in all, today's data showed that condition of the US economy is quite good, despite poor result of yesterday's retail sales report that pushed equities and the dollar lower, and sparked a gradual increase in bonds.

After the data was shown, the EUR/USD remain little changed and hovered near 1.2740. Later the FOMC member James Bullar said that the Federal Reserve may prolong the quantitative easing if inflation expectations remain subdued. That pushed the EUR/USD higher.

Risk aversion hit the zloty

The culmination of Greek problems evoked risk-aversion in the markets. That pushed the zloty lower against all its major pairs. The CHF/PLN rose at its highest level in 16 months. The EUR/PLN went up at its 7-month high and the USD/PLN moved near 3.32.

The Central Statistical Office showed today some data that have little impact on the currency market. The employment growth stood at 0.8 percent on a yearly basis – in line with expectations. In addition, wage rose 3.4 percent, slightly below expectations. Core inflation growth was 0.7 percent, up from 0.5 percent in the previous month. It was also in line with projections.

The National Bank of Poland showed a protocol form last MPC meeting. It shed some light on the MPC members view on interest rates. It is interesting that Andrzej Bratkowski, who in September voted against cuts, on Monday said that he sees the room for additional 75 basis points cut. That reflects some inconsistency among policy makers, what results in heightened volatility.

The deterioration of economic conditions in the euro zone increased the odds for additional cuts in Poland. The base case scenario is the MPC to cut rates by 25 basis points but one can't exclude deeper move. As a result, the zloty is more susceptible to increased risk-aversion due to worse interest rate disparity. On one hand the Polish currency may extend its loses, but on the other, the shift in the Federal Reserve may result in increased demand for high-yielding currencies, what may push the zloty higher.


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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