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Central European Daily

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Polish wages and inflation above consensus

Wed, Jul 16 2008, 08:49 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: US dollar development may be crucial for the CEE currencies
Fixed Income: Polish wages and inflation above consensus

Currencies

The Polish zloty edged past the EUR/PLN 3.25 mark to test fresh all-time lows in the 3.24 area on Tuesday as rate hike expectations received a boost following the higher than expected CPI and wage growth readings. The corrective move which pushed the pair to 3.26 in early trade was easily more than reversed later in the day after the data were released (more in FI part).
The sentiment remains positive for the zloty in the short term – with the EUR/PLN pair safely past 3.25 the road is open for more gains, potentially into the 3.20-3.22. On the other hand though, we have argued that chances have been growing for a technical correction given the pace and scale of the most recent gains, so a failed move lower might still result in some profit taking.

Yesterday was a calm day on the Czech FX market. After an initial weakening, the koruna managed to stay in a sideways mode around 23.34 EUR/CZK.
Today, the session could be quite similar. The focus is mainly on the US dollar and the upcoming results of major US banks scheduled for Thursday and Friday. The crucial item is whether EUR/USD pair manages to stay below 1.60 EUR/USD in the upcoming session. A break above would attract further short term speculative capital to the Czech koruna.

The Slovak koruna had another quiet trading session as nothing really happened during the day. The exchange rate remained more or less stable close to the level of EUR/SKK 30.30. Today, the eco calendar contains June harmonized inflation, but this figure is not a market mover. The koruna should further oscillate close to current levels.

The forint weakened modestly for the second day in a row. EUR/HUF closed at 231.73 from 230.47 on Monday. The weakening occurred in the morning, parallel with the Polish zloty, but part of the losses was recouped in the afternoon, also driven by this time a surging zloty. The industrial output data for May were confirmed at -0.7% M/M and + 4.7% Y/Y, but of course didn’t affect the currency. The moderate losses were technical inspired and should still be considered as a correction on the recent strong run of the forint that ran into resistance at the EUR/HUF 230 area. .

Fixed income

Polish bond yields shot markedly higher in reaction to the above-consensus CPI and wage numbers. The curve was up by 8 bps on average throughout the session with roughly half of the daily move coming after the publication of the data. Inflation came in spot on our expectations of 4.6% y/y, with the softer than expected seasonal drop in food prices weighing to the upside of the market’s and the FinMin’s estimate. Regarding the structure food, fuel and energy prices remain the most prominent proinflationary factors, and this should remain the case in the summer months as the CPI is seen reaching, or even topping 5.0% y/y in August. In our baseline scenario we see the CPI dropping to just above 4.0% y/y in Q4 due to favorable base effects in food and fuel prices, with the next up-leg (and local peak) likely to come in Q1 2009, in reaction to the next round of hikes in controlled (mainly energy) prices. All in all however the June CPI was less of a surprise than the strong labor market numbers. Wage growth reached 12.0% y/y last month, compared to the 11.0% y/y consensus, which is a clear indication that the risk of second round effect will continue to weigh on MPC’s actions in the months to come. While the numbers potentially increase the chances of a hike during the summer, we remain confident that the Council will keep to a wait and see stance at least until September. The Q2 GDP numbers, as well as the August CPI will be known by then, both of which should give a clearer picture of what is happening in the economy. The hike could even be delayed until October, when the new inflation projection will be released, given the exceptional strength of the zloty.
Regarding trading we could see bonds trade lower in prices across the curve as the market mulls over yesterday’s data. However, the price action should be calmer than yesterday as the market gears up for the next batch of crucial data (IP and PPI) on Friday.

Although yields on the core markets went down again yesterday, the Czech bond yields remained unchanged due to the stable koruna. For today, we expect the same scenario of minimal yield changes, as the retail sales are usually no market mover, especially if no surprise occurs.

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Published on  Wed, Jul 16 2008, 08:59 GMT