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Afternoon analysis 30.01.2015

, author:

Piotr Lonczak

The ruble hit by unexpected rate cut by the Bank of Russia. The inflation growth in the euro zone at new bottom. The US GDP missed expectations, but the report didn't affect the dollar. The zloty strengthened in spite of heightened risk aversion.

The inflation growth in the euro zone stood at minus 0.6 percent – Eurostat said. It was the lowest level since crisis 2009. The unemployment rate stood at 11.4 percent, slightly better than projected.

The ongoing deflation and stubbornly high unemployment pushed the European Central Bank to launch asset purchases program that includes government bonds. The ECB plans to buy 1.1 trillion euro in assets thought one and half year. Today's readings reassured monetary authorities that the decision was well grounded.

Moreover, every poor report increases likelihood that the ECB expands its quantitative easing. Some of ECB officials said that the program is open-ended – thus it will be maintained until there is no clear improvement in inflation growth and economic expansion. Today's reports pressured the EUR/USD toward 1.1.

US slippage

The US GDP growth missed expectations. Economic expansion stood at 2.6 percent – less than 3 percent projected. The poor result was caused by a slower investment growth, a drop in government spending and a wider trade gap. These factors alleviated a positive impact from the higher consumption growth in nine years fueled by strong job market and low energy prices.

However, the release didn't affect the dollar. The pace of expansion is still quite solid and short term indicators are looking good. Given these factors, the Fed will pursue its plan to increase rates in mid 2015.

Today James Bullard from Fed (currently not voting) pointed at June or July as a reasonable moment to rise credit cost. It is in line with market expectations, however the term was precisely provided by the Fed official for the first time. This leaves the dollar in a position to gain in spite of some poor reports.

Russia without a plan

The Bank of Russia decided to cut interest rates. The cost of credit was lowered by 200 basis points to 15 percent. More than a month ago the monetary authorities increased the cost of credit by 650 basis points to 17 percent, to tame currency slide. However, the situation in the market hasn't been calmed and the USD/RUB rose above 70 after the decision.

This level was tested today. The USD/RUB staying above 70 at the end of the session is a new weakness record.

Russia's move was caused by tensions in its financial system that is ailing due to high interest rates, high currency market volatility and no access to the Western financial markets. With no progress in the currency market, the monetary authorities decided to ease credit conditions as the economy if facing recession. This move revealed, the Russian authorities don't have a plan to alleviate the impact of Western sanctions, and they let the rubble to slide further.

Zloty strengthened

The zloty managed to keep Thursday's gains in spite of heightened risk aversion in the market that materialized in falling stocks. The CHF/PLN dropped below 4 zloty for the first time since the SNB decided to drop a peg in the EUR/CHF. Zloty rose also against other major currencies – the EUR/PLN dropped below 4.20.

The Monetary Policy Council holds a meeting next week. Although there will be no interest rates cut, the MPC will have to asses the impact of recent ECB decision and the situation it the money market that points at lower interest rates. If the MPC leans toward cuts, the zloty will be weaker.


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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