The highlight of the day is unquestionably the ECB meeting. A year ago, the European Central Bank caused strengthening of the euro, not satisfying excessive market expectations. Will the same happen this time?
The ECB runs currently very expansionary monetary policy. In the euro area, we have deeply negative interest rates, the central bank also finances banking sector, still runs the asset purchase program – QE. The size of the monthly purchase amounts to 80 billion euros. Program expires in March next year, the markets expect its renewal.
The ECB runs currently very expansionary monetary policy. In the euro area, we have deeply negative interest rates, the central bank also finances banking sector, still runs the asset purchase program – QE. The size of the monthly purchase amounts to 80 billion euros.Program expires in March next year, the markets expect its renewal.
European Central Bank indicated earlier that the euro zone is not ready for a quick reduction of expansionary monetary policy, even with improved economic situation in the euro area in recent years. The Bank may also make technical modifications. However, any mentions of tapering, or reducing the scale of the current expansion would result in rapid appreciation of the euro and decline in European indices. ECB will announce its decision at 13:45, while the conference will be held at 14:30. We expect that the decision on the asset purchase program will be presented at 13:45, while the details of the decision will be announced during the conference. EUR morning strengthened against the US dollar by 0.13% and is above 1.076.
Yesterday we saw a dynamic rally in European equity markets. DAX rose by almost 2%. Increases were driven by banks, Deutsche Bank shares prices rose by about 4.5%. The banking sector makes well after announcement of support for the oldest Italian lender – Banca Monte dei Paschi. Investors also assume dovish message from the ECB, an extension of the QE and possible, technical improvements. Any correction can be caused if ECB surprises markets.
Good sentiment could be seen during the Asian session. This was due to good data of Chinese trade balance. Chinese trade continue to benefit from cheaper Juan. If will not happen increased protectionism (and after election of Trump for president such fears are more real) than favorable situation for China can continue to improve the economic situation of the country. Export calculated in Renminbi had to fall by 1% y/y meanwhile, grew by 5.9%.
PLN (Zloty) remains relatively stable. In the morning, we saw a wave of weakness after the publication of Moody’s. Agency pointed to the fact that the economic slowdown in the third quarter is a negative signal for the debt market, it undermines the prospects for growth and tax collection. The same can translate to increased uncertainty among investors. Agency cut her growth outlook for the Polish GDP to 2.8% from 3.1% (2016) and to 2.9% from 3.0% for 2017 years.
Agency also indicates that the deficit may be larger. Target of 2.8% for GDP for 2016 years is realistic due to the good performance of the budget, but next year the situation may present itself much worse. Yesterday we had to deal with the message and conference of NBP. The central bank sounded optimistic and indicated that the situation is surprisingly good, so the rates in 2017 will probably not be changed. EUR strengthened by 0.02% against the PLN (4.4348), USD lost -0.08% (4.1204), CHF gaining + 0.12% (4.09) and GBP + 0.04% (to 5,209).
Adam Puchalski, analyst Financial Markets XTB