CEE Macroeconomic and Fixed Income Research

Analysts’ View:

Looking Ahead in CEE This Week: Inflation numbers due to be published this week in Poland and Slovakia should follow the same pattern we saw last week in Romania, the Czech Republic and Hungary, where inflation finally edged up or deflation eased. Perhaps the most important event to watch this week is, however, the meeting of the Polish central bank which is expected to keep rates unchanged despite recent gains by the Polish zloty (at a 3.5-year high vs. the EUR). So far, the zloty has not appreciated to a level against the euro that could justify fears of increased deflation. In addition, interventions (verbal and later FX) could remain the preferred tool over rate cuts in the coming months.

PL Macro: Poland opens this week’s release calendar with trade and current account data. We expect that the current account surplus (EUR 180 mn) will be driven to a great extent by the positive trade balance which we expect mainly due to the low price of oil. Our CA forecast is only slightly above market expectations, and thus, we do not expect to see a major impact on the zloty if such a scenario materializes. Moreover, we believe that global sentiment is currently more important for the movements in EURPLN. We expect the zloty to remain strong and close to 4.02 vs EUR at the end of 2Q15.

TR Rating: Moody’s did not disclose a rating review for Turkey on Friday although April 10 was one of the agency’s pre-scheduled potential review dates. Moody’s did not post any statement either regarding its Baa3 rating for the Turkish government or the negative outlook. Since the risks to Moody’s view on Turkey were on the negative side, the lack of any change could be market positive. Moody’s downgraded the outlook on Turkey’s Baa3 rating in April 2014 and now that Moody’s has skipped its third pre-scheduled review date in a row since last year (August 2014, December 2014 and April 2015), a rating assessment in the post-election period could be possible. Moody’s next pre-scheduled dates are August 7 and December 4, but before that S&P may revisit Turkey on May 8.We continue to foresee downside risks to our 9% midyear forecast for the two-year bond yield.

Traders’ Comments:

CEE Fixed income: Local currency government bond yields were largely unchanged d-d on Friday and were only really substantially lower in ROMGBs w-w but CEE cash corporates were undeniably better bid as the hunt for yield continues and CEE FX remains under pressure to appreciate. This week, we will have the ECB monetary policy meeting on Wednesday which will take place on the same day as the MPC meeting in Poland. Obviously, the combination will determine the direction of EURPLN but Polish March CPI is also due on Wednesday and analyst expectations have been consistently higher than the actual outcome over most months since September 2013 as deflation accelerated. The NBP decision to halt rate cuts will seem increasingly premature if the PLN continues to strengthen and deflation continues unabated. Chinese exports plummeted unexpectedly in March raising questions over the durability of global demand. Indeed, the ascent of the USD is having a negative impact on US growth prospects and also on those countries whose currencies track the USD (like China) or export commodities (like Brazil) or borrow in FX (like Turkey). The Eurozone (specifically Germany) is a beneficiary and, by extension, Poland should be as well but Hungary is typically seen as a potential loser, however, the HGB 3.5% 20 yields over 50 bps less than similarly rated CROATE 6.75% 20 making HGBs look relatively expensive. Yields on longer dated HGBs rose between 6 and 10 bps during the trading session on Friday in spite of a surge in the HUF to 296.25 vs EUR on what our trading desk tells us was decent sized turnover. Our FX traders expect the EURPLN to test the psychologically important level of 4.00 very soon which should open the way toward 3.96. In this instance, we would expect the POLGB yield curve to bull steepen and Hungarian markets to move in a similar fashion.