Afternoon analysis 23.01.2015

The euro at new lows after ECB decision on quantitative easing. The zloty exploited the weakness of the euro, but the Polish currency didn't manage to gain against other major currencies.

The European Central Bank decision on launching quantitative easing fixed market trends in the longer term. As a result, one can expect further drop of the EUR/USD to the parity as there is no chance that the US Federal Reserve leaves its plan to increase rates in mid 2015.

The Frankfurt-based institution will buy as much as 1.1 trillion euro in assets, including government bonds. The monetary authorities said that the program will last until the ECB fulfills its inflation goal and there is a clear improvement in the economy.

This means, that investors have obtained more than previously expected. The condition that the ECB could extend purchases period (what equals to larger amount of purchases) guaranties that without significant increase in inflation and GDP the QE will remain in power. However, critics of bond-buying – the German Bundesbank in a first line – also got assurance that the program will be canceled if inflation is high.

Greek elections

The flash estimates of January PMI reports from euro zone countries were rather poor. Although there was some improvement in France, the PMI stood below 50 – a level that separates growth from contraction. The German data was also weaker than expected and the overall PMI report for the euro zone showed no significant bettering.

The positive reaction of investors was visible in rising stock markets in the US and in Europe. Also, the demand for high-yielding assets was strengthened.

Given the ECB buying government bonds, there was a very strong drop in bond yields in the euro zone – the yields hit the lowest levels on record. As a result, countries with tensions in public finance will have the opportunity to conduct reforms or finance public investments to spur GDP growth. The ECB president Mario Draghi stressed the need for reform in the euro zone countries, what will facilitate economic improvement.

After the hit from the Swiss National Bank and the final decision from the ECB, the markets' attention shifts toward elections in Greece on Sunday. Polls point at Syriza win – the party said that it will renegotiate bailout and drop reforms imposed by the European Union. However, it is not certain whether Syriza will form a government and it may need a coalition partner, what will dilute its stance.

There was a moment when market participants worried that Syriza win would resurrect the specter of the euro zone dismantle. But currently the odds for a similar scenario are rather low. Thus, the impact of this risk factor will be rather tamed.

The euro hit new lows against the dollar – the EUR/USD dropped as low as 1.1113. But later the shared currency bounced back due to profit taking and it rose to 1.1260.

The zloty with chance for gains

The Monetary Policy Council will need to reassess its stance given the ECB actions. Thus, the likelihood for interest rates cuts is now higher (a wider view in our morning commentary), as the money market points at cuts. The National Bank of Poland president Marek Belka said that the MPC is moving toward lowering rates.

The ECB decision increased demand for high-yielding assets – thus the zloty is in a position to gain. However, the Polish currency will increase against the euro and in a smaller extent against the British pound. The dollar and the frank will remain at high levels.