Daily analysis 22.04.2016:
Mario Draghi’s testimony yesterday was neutral for the euro. News regarding the possible actions from the Bank of Japan overvalue the yen. The German as well as the French PMI does not have an impact on the euro. The zloty is the weakest among the 24 emerging markets' currencies this month. The euro costs 4.35 PLN.
The most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- No macro data that could significantly impact the analyzed currency pairs.
No surprises from Draghi
Looking at the behavior of the EUR/USD exchange rate from yesterday afternoon, we can come to a conclusion that the ECB’s decision surprised market participants. This was caused by a rebound of the main currency pair to the area of 1.1400. However, the press conference of Mario Draghi, which occurred after this, reversed this trend. As a result, the main currency pair depreciated by 130 pbs.
However, the truth is significantly further from the EUR/USD moves. The decision regarding the lack of changes in the basic parameters of the monetary policy was widely anticipated. Thus, the initial appreciation of the euro can be considered as unjustified. The later decrease did not have much in common with Draghi's statements, because it began directly after the press conference ended.
Even if we would like to go further into the details of yesterday's announcement and the ECB chairman's answers, it would be difficult to find any breaking elements. Basically, the only matter that could draw some attention was the possibility of a further decrease in deposit rates.
However, Draghi avoided answering the question in a quite clever way regarding the possibility of cutting deposit rates. He claimed that, “the ECB is ready to use any tools available.” It is worth noticing that deposit rates are among these tools. This suggests that they may be used if needed. On the other hand, the ECB is preparing more for an operation of quantitative easing, rather than an increase in burdens for the bank deposits. Thus, Draghi's answer leaves space, but does not settle a choice of a specific instrument.
As a result, we should claim that yesterday's testimony was neutral for the European currency. Moreover, it was probably quite consistent with the general expectations of the market. Thus, the market will probably begin to wonder, in which direction the Federal Reserve's announcement will go. It is planned to be published next week.
Interesting events on the yen
We could observe a clear wear-off on the yen this morning. Bloomberg announced that the Bank of Japan (BoJ) may consider an introduction of negative interest rates for some types of credits. This caused the USD/JPY pair to increase by 120 pbs.
The information agency is quoting anonymous people who are familiar with the case, and claims that the BoJ, “may help the financial institutions by offering negative interest rates for some types of credits.” Moreover, it will probably be combined with a decision about a bigger decrease in deposit rates.
It is also worth noting that the BoJ meeting will be held next week. If the above mentioned modification of the monetary policy takes place, the scope of the central bank's activity will increase. Commercial banks would experience the effects of negative deposit rates to a smaller degree. This would increase the space for actions of the BoJ. Theoretically, this should be a strongly negative signal for the yen.
PMI from the euro zone
It is worth observing the trends dominating in the PMI indexes of the euro zone, even though they recently do not have as strong of an impact on the evaluation of the euro. This tendency can be considered as a relatively stable, although changes can be observed in particular countries.
The group PMI index for services and production decreased by 0.1 points (now at the level of 53.0). Thus, this was a minor change, even though Markit took note of, “an increase in new orders to its three-month peaks, and a slight increase in employment.” In his comment regarding the data, Chris Williamson, chief economist at Markit, estimated that the PMI is suggesting an increase at the level of 0.3% for the entire euro zone in the second quarter.
On the other hand, there was an increase in the difference between the industrial sectors of the euro zone's biggest economies. In Germany, this index increased to the level of 51.9, and reached its three-month peak. France, on the other hand, experienced a decrease in this index to the level of 48.3 points (this equals its eight-month minimum).
Increasing overvalue of PLN
At approximately noon, the EUR/PLN was at the level of 4.35. The zloty is under similar pressure against the dollar. The American currency costs 3.85. However, what is important is the fact that a strong overvalue of the Polish national currency overlaps a calm behavior of the broad market, and a neutral evaluation of the region's currencies. This is confirmed by the behavior of the PLN against the HUF. Since the beginning of April, the Polish currency lost 3.5% of its value against the Hungarian currency.
It is also worth noting that the PLN has been, and currently is, the weakest currency among the 24 emerging markets since the 1st of April. Where does this overvalue of the Polish currency come from? The main reason is the fear of cutting the rating by the Moody's agency. Economists fear that its scale will be similar to the one made by the S&P (degradation by one rank with a negative perspective).
The zloty and the bonds are no longer competitive for foreign capital, not only due to lower than expected loan credibility. This is also because of the context of return rates. Dmitri Barinov, the manager at Union Investments, who was cited by Bloomberg as preferring high-rate assets from Brazil, Turkey or Russia. “Poland is attractive in comparison to the euro zone, but not among the emerging markets for the time being,” claims Barinov.
Thus, it is possible that Poland found itself in the following space – it is too dangerous for more conservative investors (thus they abandon the Polish market), and those who have a smaller risk aversion move their capital towards raw materials countries. In these countries, due to a rebound of oil and industrial metals, the risk decreased and rates are high or very high. If this trend remains, the situation on the zloty may continue to deteriorate, irrespective of the global sentiment.
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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