Afternoon analysis 16.12.2014:
Crisis of the Russian currency intensified. The zloty hit by heightened risk aversion. Data from Poland slightly missed expectations. German reports gave some relief.
The developments in the rouble market are signalling currency crisis. Today the Russian currency posted about 20 percent losses against the dollar. However, this move was somewhat surprising as the Central Bank of Russia increased the key interest rate by 650 basis points to 17 percent to tame currency slide and inflation (a wider view on this issue in our morning commentary).
Pressure on the rouble increases as the oil price falls. The Russian government is planning to cut spending by 10 percent due to oil slide that hurts revenues. Today Brent oil price dropped below 60 dollars – the level if persists, the Russian GDP may fall about 5 percent, according to government's report.
Another negative factor for the economy are sanctions imposed by the United States and the European Union over Moscow's involvement in the Ukrainian crisis. As a result, Russia has to face high inflation that is to exceed 10 percent in the near future (Russia is depended on imports of staple food).
Germany in better shape
The latest data from Germany are quite good. The manufacturing PMI – report on industry condition – rose more than anticipated. Also, the ZEW index – a measure of investors' expectation for economic performance within six months – was better than expected. Given those report, a slightly worse than expected service PMI is neglect.
However, worse performance was shown by other key economies. In France PMI reports moved farther below 50 points – the level separating growth from regress. Flash estimates of PMI are not published for Italy. Nevertheless, broad measures from the euro zone – for industry and service – posted some improvement in December.
Although, we can't say that there is any breakthrough in the monetary union, the recent data gave some hope for further improvement. Especially in Germany, where improvement was signalled earlier by the Ifo index and ZEW, what today was confirmed by PMI reports.
The European economy needs increase of credit supply to return to dynamic growth. Currently, this is not the case, what leaves room for the European Central Bank to act. The ECB will probably decide to use full quantitative easing – asset purchases program that includes government bonds – in the first quarter of 2015.
The weakness of the dollar
The latest developments – currency crisis in Russia and poor performance of the global economy (today China industrial PMI was below expectations) – were treated by some market participants as a reason for the Federal Reserve to defer tightening of its policy.
These speculations are strong enough to push the dollar lower. However, this view is going to be confronted with reality tomorrow as the Fed releases its rates decision and statement after the Federal Open Market Committee meeting. The latest developments were not sufficient to alter outlook for interest rates in the US, what may result in stronger dollar.
The zloty influenced by Russian turmoil
The sell-off of risky assets in the region resulted in weaker zloty. The Polish currency dropped significantly against the euro – the EUR/PLN rose to 4.2365 from today's lowest level of below 4.18. The slippage against the dollar was smaller.
This move was not well grounded as the linkage between Polish and Russian economies is not significant. The exports to Russia shrank to 4.4 percent this year – down from 5.3 percent in the previous year. This however didn't result in weaker performance of the economy, as the GDP growth exceeded expectations.
Today's data from the Polish economy was somewhat meagre. Although the employment growth (0.9 percent) was in line with expectations, the wage growth (plus 2.7 percent) was worse than expected.
Nevertheless, today's data didn't change the outlook for interest rates as the Monetary Policy Council won't cut the cost of credit. The heightened volatility, that negatively affects the Polish currency, supports this view. All in all, the recent developments deferred the prospects for a stronger zloty.
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