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Daily analysis 20.10.2016

, author:

Marcin Lipka

The ECB announcement and Mario Draghi’s press conference are at the center of attention. The British minister of finance is against a hard Brexit. Will this change the pound’s situation? The zloty is relatively stable before the ECB meeting.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 14.30: The ECB announcement and Mario Draghi’s press conference.

ECB in center of attention

Speculations regarding the withdrawal of the ECB from the QE have been increasing over the past few weeks. This was mostly because of information from Bloomberg. At the beginning of October, the agency cited people who were familiar with the case in which if there were a withdrawal from the monetary easing, the assets purchase would reduce at a pace of 10 billion euro per month.

Of course, it’s possible that such discussions actually took place. However, the crucial information is a possible initiation of the QE reduction. Some of the market participants have mostly come to a wrong conclusion that the current round of assets purchase is planned to end in March 2017. Therefore, the exit procedure could start now.

However, taking into consideration the recent statements from Draghi or the minutes from September, this scenario seems very unlikely. The odds are definitely larger that the QE will be extended for the next six or nine months today or in December. At the same time, modifications of the assets purchase condition will be announced as well. This will most likely be based on easing the conditions, which allow the central bank to purchase bonds.

If this modification is suggested today and real changes are introduced at the beginning of December, pressure on the euro will increase. Therefore, if Draghi is relatively dovish during his press conference, the EUR/USD may test the area of 1.09 today.

Hammond in favor of mild Brexit

In his testimony from yesterday, the British minister of finance said that, “the financial sector is a priority in negotiations with the EU.” Moreover, he doesn’t think that, “highly qualified employees would be the subject of migration control.” He also spoke positively of the monetary policy. In his opinion, it is to provide the economy with 2.7 million workplaces.

Clearly, Hammond’s statements differ from the standpoint of Theresa May and her government. Recently, May had criticized the monetary policy, as well as prioritized the matter of immigration control over the UK’s access to the EU market. However, Hammond said that a dissonant approach towards the Brexit conditions within the government is not a secret. It does remain a secret, however, who will decide to compromise.

On Tuesday evening, The Telegraph informed that Hammond told Prime Minister May that he won’t resign his post. Moreover, some of the government members accuse Hammond of “denying Brexit.” Taking into consideration the referendum’s result, as well as a significant advantage for the Conservative Party in surveys, Hammond’s chances will be minor in the case of escalation of the internal conflict. This would most likely be another negative signal for the pound.

A chance for zloty?

The Polish currency remains weak and the euro costs approximately 4.32 PLN. However, the zloty’s situation may improve in the afternoon. If Mario Draghi suggests an extension of QE in December, the zloty may benefit from this information. It’s possible that the EUR/PLN would return to the area of 4.30, or even below.

The Polish Press Agency published a statement from Łukasz Hardt of the MPC before noon. He claimed that, “there is a likelihood of rate hikes next year and it has increased slightly.” He also pointed out that, “economic uncertainty is very high.” By this, he mostly meant the matter of investments.

 

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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