Daily analysis 27.11.2015

, author:

Marcin Lipka

Expectations of the investment banks regarding the European Central Bank's (ECB) actions. Will Mario Draghi manage to cross the market's consensus? The zloty remains under pressure at the end of the week.

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

  • No planned macroeconomic data that could have a significant impact on the analysed currency pairs.

Expectations of the investment banks

It is very likely that the financial media will publish the market's consensus regarding the ECB actions on its Thursday's meeting, already at the beginning of next week. However, recent statements of monetary authorities' representatives and unofficial information presented by Reuters, already show that the bar before December's meeting has been set really high.

According to Bloomberg information, Commerzbank, Citibank, and RBS, claim that the ECB deposit rate will be decreased by 20 base case points, down to minus 0.4%. Also the BNP Paribas changed its expectations towards the actions from the European monetary authorities within past few days. The bank increased the expected scale of rates' cutting from 10 to 20 base case points.

According to terminal interest rate contracts, probability of a decrease by 15 base case points is currently 90%, and by 20 base case points – 77%. This may mean that cutting of interest rates by 0.2% doest not have to mean a clear wear off on the euro. It is despite that at the beginning of this month, such movement would be considered as exceptionally dovish.

In context of an increase in, or extension of the quantitative easing, the investment banks are also forming expectations, which only a few weeks ago would be considered as very mild. Now, on the other hand, they are becoming the market's consensus. Commerzbank claims that quantitative easing will be increased by 20 billion, Nordea thinks of an increase in the QE by 10-20 billion, and the RBS assumes that the QE will be raised by 25 billion euros.

Additionally, the RBS assumes that purchase of assets will be extended until March 2017, and Commerzbank does not exclude that the ECB will conduct an open QE. Open QE would not have a time limit, and it would probably be conducted until appearance of clear signals of an increase in inflation, or a visible improvement in economic situation (especially regarding the employment).

Will it fulfil or top the expectations?

In the case of changes in monetary policy, the monetary authorities of developed economies try to top the market's expectations. This is how the Fed and Bank of Japan behaved, among others. The ECB will probably walk down the same path.

However, there is a certain problem of this concept. The closer to the ECB meeting, the greater the expectations. It is worth noticing that an increase in the QE by 20 billion since January, and an extension of assets purchase until March 2017, means that during next 15 months the central bank will buy assets worth 1.2 billion euros. This would mean an increase in assets by almost 50% in comparison to the current level.

On the other hand, Mario Draghi and his colleagues must be aware that their recent statements also increased these expectations. Thus, one can assume that the above estimations may really be fulfilled, or even topped. This can be done, for example, by suggesting an open QE program, which means practically resigning from time limits. With an increase in purchase of assets and a decrease in deposit rate by 20 base case points, this fact could be another historical moment for the ECB. At the same time it would probably put the euro under enough pressure that would cause the EUR/USD to test the level of 1.00 in the following weeks.

Few words about the foreign market

Today the main currency pair will probably stay within the limits of 1.06. With limited activity of market participants from the United States, and also before important decisions from the ECB, the market participants may cease themselves from more fundamental decisions. This should cause relatively shallow changes.

The zloty remains weak

Not much happened on the national currency during past few hours. However, looking at the zloty from the perspective of the following week, and assuming that the ECB will cross the forming market's consensus, we can assume a wear off on the euro, and what follows, depreciation of the EUR/PLN. If the ECB actions cause the EUR/USD to go below 1.05, it is also possible that the European currency will cost less than 4.25 PLN.

On the other hand, a sudden wear off on the euro will probably result in higher evaluation of the pound and the dollar expressed in the PLN. There are slightly more questions regarding the franc. If the SNB appears to be effective in defending the Swiss currency from enforcement, it is possible that the CHF/PLN will go below 3.90.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.0550-1.0650 1.0650-1.0750 1.0450-1.0550
Range EUR/PLN 4.2400-4.2800 4.2400-4.2800 4.2400-4.2800
Range USD/PLN 4.0000-4,0400 3.9600-4.0000 4.0400-4.0800
Range CHF/PLN 3.9000-3.9400 3.9000-3.9400 3.9000-3.9400

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5050-1.5150 1.4950-1.5050 1.5150-1.5250
Range GBP/PLN 6.0600-6.1000 6.0200-6.0600 6.1000-6.1400

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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