CEE Macroeconomic and Fixed Income Research

Analysts’ View:

CZ FX: In a belated reaction to President Milos Zeman's refusal to appoint supporters of FX intervention (EURCZK above 27) as CNB bank board members, the koruna appreciated Thursday morning to below 27.20, reaching the strongest level since the launch of the CNB interventions to weaken the crown in November 2013. The recent development poses a risk to the CNB's commitment to maintaining the EURCZK above the 27 threshold. However, the CNB has said that the speculative pressure on the EURCZK to fall below the 27 floor may serve as a catalyst along with the impact of ECB QE (intended to weaken the EUR) but also decelerating growth in domestic wages for them to reintervene in order to weaken the crown. We continue to see the EURCZK appreciating to 28 at the end of 2Q15.

PL Rates: The minutes from the MPC’s last meeting showed there was hesitation amongst voting members to lower the policy rate due to external factors that drive deflation. Nevertheless, there is a will to ease monetary conditions further if the inflation projection confirms prolonged deflation and an inflation rate below the medium term target. We think this is going to be the case. Our baseline scenario assumes a 25 bp cut as, in our view, there is lot of concern about financial stability but we cannot rule out a one-off 50 bp adjustment. We still see a further drop in 10y POLGB yields toward 1.7% by mid-2015.

RO Bonds: At yesterday's auction, the MinFin managed to sell RON 700 mn of a seven-year T-bond issue maturing April 2020. The average yield stood at 2.53% (-28 bps compared to the previous tender held in mid-December 2014), although demand only slightly exceeded the raised amount (the bid-to-cover ratio was 1.13). It seems that the recent developments in Greece and Ukraine have curbed investor appetite for local sovereign debt. For the time being, we stick to our current 5-year ROMGB yield forecast of 2.3% over the course of the year.

Traders’ Comments:

CEE Fixed income: While fixed income investors took heart from a perceived U-turn on the part of the Greek government, it’s still anyones call on how the negotiations will end given that Germany’s Finance Minister, Wolfgang Schäuble, obviously wants to be seen as playing hardball even though other voices within Germany are pushing for a compromise, most notably the President of the European Parliament Martin Schulz and the SDP Vice- Chancellor and Minister of the Economy Sigmar Gabriel. Global equity markets don’t appear to be overly concerned but we may see some weakness today as investors square positions ahead of the weekend just to be on the safe side. Elsewhere, NBP Governor Belka also did his best to confuse investors with his statement that the PLN is undervalued but the POLGB yield curve bull steepened as yields fell across the curve, most strongly in shorter dated maturities. The FRA 3x6 is still around 30 bps below the current 3m WIBOR indcating that the market still expects at least a 25 bp cut from the NBP but the cut may well have to be bigger if the PLN strengthens which makes Belkas statements somewhat puzzling. Somewhat more predictable was the weakness in RBI sub debt following the downgrade by Moody’s. According to Bloomberg, the price of the RBIAV 5.875% 23 sub debt fell by almost 12 cents to 82.2 cents, the biggest drop since January 27.