Afternoon analysis 10.11.2015:
The euro returned to losses. The common currency bowed under pressure of the expectations for the European Central Bank to provide more stimulus. The zloty was steady in the adverse environment.
Discussion on whether the European Central Bank should extend the bond buying program has entered its final phase. Only one month is left before the ECB's meeting in December. In October ECB President Mario Draghi suggested that at the final meeting of 2015 the monetary authorities will decide on additional stimulus. In remarks after Draghi's speech other ECB members have confirmed a similar scenario.
However, today Bundesbank President Jens Weidmann warned that that too loose monetary policy for too long poses a threat to the financial stability. His stance was not surprising as the German central bank chief is known for his hawkishness. Nevertheless, Germany's may pose some problems given the expectations that the ECB will add to stimulus.
In spite of hawkish comments from the representative of the major eurozone central bank, the euro dropped. As expected, Monday's rebound potential was limited.
In the context of the outlook for QE expansion, the major event will be Mario Draghi's testifying in the European Parliament. If the ECB President signals more stimulus, the euro may drop further. Given the situation, doubts expressed by the German central bank are not very important.
On the other hand, the dollar was steady. The latest comments from the Federal Reserve's members have supported the case for tightening in December, but it did not result in a stronger dollar. It was caused by the fact that the December's hike has been mainly priced in. And today's EUR/USD drop was caused by the weakness of the common currency.
The deflation threat in China has increased the probability of more stimulus. In October, the consumer inflation rate dropped to 1.3 percent. Producer's prices dropped 5.9 percent. It was the 44th drop in a row. As a result, pressure on the People's Bank of China and the government increased to provide more support to the economy.
It should support the risk assets. However, in the shorter term the scenario has not been resolved. The Chinese central bank has cut rates for six times since the end of 2014. And it is very likely, it may wait to the next year before taking any actions. It limits the impact of this factor.
Risk aversion has prevailed in the markets since the beginning of the week. It has been reflected in broad decline of stock indexes. Given the situation, the zloty performed relatively well.
The new government was positively welcomed by investors. On Monday the zloty posted some gains as the political risk was limited. And today, the Polish currency's basket was steady. It performed better than other emerging market currencies. If the political risk continues to drop, the zloty may be supported further.
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