Afternoon analysis 20.01.2015

, author:

Piotr Lonczak

The euro was little changed as investors wait for the outcome of ECB meeting. Unexpected improvement of Chinese and German data. The zloty dropped against the frank and other major currencies.

After strengthening on Monday's session, the euro today dropped again. However, the EUR/USD kept distance to the lowest level in eleven years that was reached on Friday.

The expectations for the European Central Bank actions were not altered. On Thursday, the Frankfurt-based institution will decide to launch a full blown quantitative easing. The central bank will essentially buy government bonds and upper limit for purchases will be set at 550 billion euro, according to Bloomberg survey.

Given the Swiss National Bank decision to drop cap on frank, the European monetary authorities mustn't disappoint investors. The markets need a calm environment that will help to revive credit action, support investment activity and result in higher GDP growth. The ECB needs significant economic improvement to fulfill its inflation goal, firstly by fending off deflation.

Data improvement

Today's report were quite positive. The ZEW index – a measure of expectation for developments in the German economy – was better than estimated. The gauge stood at its highest level since 11 months. In addition, the report helped to improve the outlook for the major euro zone economy, after some disappointing data from industry (production reports and orders data).

Moreover, the ECB report showed that credit conditions eased for the third quarter in a row. In addition, there was some pick-up in credit demand. The readings unveiled that actions that were undertaken by the ECB in the middle of 2014, are starting to percolate into the real economy. Although the risk aversion is still significant, the TLTRO and record low interest rates create environment for stronger growth. If its supported by the QE, the outcome will be more visible.

China data was also better than expected. Although the GDP growth in 2014 was the lowest in 24 years, the pace of growth was higher than expected – it stood at 7.4 percent – a somewhat lower result than government goal of 7.5 percent. Moreover, it the fourth quarter the GDP growth was 7.3 percent – more than anticipated.

An improvement in economic reports was not reflected in market sentiment. Until the ECB unveils its ultimate decisions on the QE, the markets will be susceptible only for information concerning bond buying.

Zloty pressured

On Monday the zloty was strengthened against the frank, but today the Polish currency resumed a drop against the Swiss currency. However, the movement is quite tamed, given recent moves. The volatility in the CHF/PLN is going to decay, but the exchange rate will remain at high level.

Reports from Poland didn't make impression on the zloty. December's reports from the labor market were very good – employment and wages exceeded expectations. A strong labor market will be helpful in returning the inflation growth to the central bank's goal. The increase in real income is to result in stronger consumption, what will add to GDP growth.

In the upcoming days the zloty will be influenced by the investors' reaction to the outcome of the ECB meeting. If the ECB please investors, the demand for risky assets will increase, what may lift the zloty in the longer term.

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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