Afternoon analysis 31.10.2014:
The EUR/USD plunged after mixed data. The zloty and other CEE currencies slide. The inflation rate in the euro zone didn't surprise.
The Bank of Japan's move to expand its stimulus program was the major news of the day. The Japanese central bank increased its aimed monetary base expansion to 80 trillion yen from 60-70 targeted so far. Additionally, the nation's wealth fund revamped its investment policy and it will be able to put more money in foreign assets and stocks.
As a consequence, a limit for foreign bonds was lifted to 15 percent from 11 percent earlier. This means that the fund may be more eager to invest in securities from countries like Poland, that provide relative high yields with limited risk. Therefore, it may result in an increased capital influx to the Polish debt market.
Given that, another topic is interesting. The finance ministry said today, that the foreign investors lowered their holdings of the Polish government bonds. The US investors reduced their exposure most strongly by 1.3 billion PLN. Conversely, some investors increased holdings of the Polish debt and among them were investors from Japan (up 1 billion PLN).
That reflects the new trends in the market, where the Fed is tightening and pulling back capital from emerging markets and the BoJ moves in the opposite direction. As a result, today yields on the Polish 10-year zloty denominated bond fell as low as 2.527 percent – the lowest level in history.
The EZ inflation and US swing
The inflation growth in the euro zone stood at 0.4 percent, slightly up from 0.3 percent in the previous month. It was in line with expectations, thus although the report is crucial for the European Central Bank, it didn't spur any significant moves in the market. In addition, the unemployment rate was 11.5 percent, no change from the previous month and near its all time high of 12 percent.
More interesting data came from the United States. The personal consumption expenditures index, the Fed's favorite inflation measure, stood at 1.4 percent – lower that 1.5 percent expected. Moreover, the numbers on household's income and spending were disappointing – spending fell unexpectedly 0.2 percent and income rose 0.2 percent – less than projected.
However, the subsequent reports were significantly better. The Chicago ISM stood at 66.2 points, up from 60.5 points in the preceding month and more than 60 points expected. Additionally, the University of Michigan consumer confidence index rose to 86.9 points against 86.6 points expected.
As a result, the dollar extended gains against its major pairs. The EUR/USD dropped below 1.25 and touched its lowest level since August 2012. The USD/JPY rose above 112 – the highest in six years.
The zloty under pressure
Good performance of the Polish debt didn't support the zloty. The currency wasn't supported by some quite positive news from Ukraine that the gas agreement was signed and the president Petro Poroshenko endorsed Arseniy Yatsenyuk as the new prime ministers, what ends a stand-off between main Ukrainian parties.
The zloty, as other CEE currencies, would have been affected by very poor performance of the rouble. The Russian currency posted significant losses despite the central bank effort to tame drop with rate hikes (the main rates was lifted by 150 basis point against 50 bp. expected). Today the USD/RUB is up about 3.5 percent (a broader view in our morning commentary).
The National Bank of Poland said inflation expectations remained stable at 0.2 percent. It was higher than 0.1 percent expected by analysts surveyed by Bloomberg. This factor may be seen as an additional argument for the hawkish part of the Monetary Policy Council to not to lower interest rates. Today's data reaffirmed expectation that the cut in November will amount for 25 basis points and it will be the last in this cycle.
The dollar rose to 3.3721 against the zloty – the highest level since July 9. 2013, when it hit 3.3785. Other CEE currencies also posted significant losses against the US currency. The zloty, similarly as yesterday, was quite strong by the noon, later however it went down. In the near term current tendencies – the rising dollar and stable euro – will be probably maintained.
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