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Afternoon analysis 19.09.2014

, author:

Piotr Lonczak

The zloty fell against the dollar and the pound and rose against the euro and the frank. After this week's developments this tendency is going to be valid in the near future.

The last few days provided crucial information on the plans of key central banks. The statement and the forecast showed by the Federal Reserve assured the expectations for a drop of accommodative policy by the US monetary authorities and shift toward rates-driven policy.

The minutes form the Federal Open Market Committee preserved the statement that the Fed will interest rates at record low for a “considerable period”. When asked about that phrase the Fed chairwoman Janet Yellen said that the central bank is not committed to particular schedule but will rather assess the data from the economy to determine the best moment for interest rates hikes. In addition, the Fed published a draft of principles of policy normalization.

Moreover, the US data support the case for interest rates increase. Especially, the Thursday's labor market report was very supportive for the dollar. The number of unemployment claims fell to 280,000, lower than 305,000 expected. As a result of recent developments, the dollar is at its highs against the euro and the yen.

The ECB disappointment

The European Central Bank TLTRO allotment was below expectations. The four year loans at a 0.15 percent fixed interest rate was seen as a way to revive a credit flow into the real economy. Eventually, banks asked only for 82.6 billion euros, lower than 150 billion euro expected according to Bloomberg.

Mario Draghi, the ECB president, plans to expand the central bank's balance sheet to three billion euro from current two billion. To achieve this goal the ECB has cut interest rates at record low and will launch the asset-backed securities purchases in October. The TLTRO announced in June is an important tool in Draghi's effort to revive growth and ward off deflation.

Although the ECB has undertaken unprecedented measures some commentators suggest that the central bank will have to use full quantitative easing – what includes government bonds purchases – to achieve its goals. This proposition has been criticized by the Bundesbank, that didn't support September's actions of the ECB.

BOE may focus on the economy

The Scottish independence referendum was victorious for the opponents of secession. 55 percent of voters supported the “no” compared to 45 percent who backed independence. The pound was relieved after the result was published.

The Bank of England is seen as the first key central bank to rise interest rates after the crisis. That presumption had been undermined due to turmoil before the independence vote. Nevertheless, now the BoE will focus on economic data. The latest data from the labor market – the unemployment rated fell to its lowest in six years and wages increased – supported the case for interest rates hikes. In turn, the retail sales growth eased slightly but that didn't hurt the pound.

The expectations for interest rates in the United Kingdom will push the pound higher. Although in the next few days we may observe some profit-taking, but in the longer term the pound will probably rise.

The zloty awaits cuts

The data published in the last few days prejudged the interest cuts in October. The weak result of industrial production (it fell 1.9 percent against 0.5 percent growth expected) fulfilled a poor picture of the Polish economy after low PMI index and muted employment data. In the next week the Central Statistical Office will publish the unemployment rate and the retail sales report. The data may only strengthen the case for cuts. If the next week's data is below expectations, it may start speculations that the MPC would cut interest rates for 50 basis point against current consensus of 25 bp.

The cut scenario was confirmed by the minutes from the MPC September meeting, that said that “the majority of the MPC members” support the case for cuts. That puts negative pressure on the zloty against its major pairs. To sum up, the recent developments will result in stabilization of the EUR/PLN and the CHF/PLN at current levels, and the USD/PLN and GBP/PLN will probably rise after short period of profit-taking.


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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