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Central European Daily

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The Polish MPC will leave rates unchanged today

Wed, Oct 29 2008, 08:19 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: HUF recovers on €20bn joint IMF, World Bank and EU rescue package
Fixed Income: The Polish MPC will leave rates unchanged today

Currencies

The Hungarian forint appreciated sharply to 260 from 276 as markets cheered the financial aid that has been agreed between Hungary and the IMF. The government announced further austerity measures, mainly nominal spending freeze, cancellation of the 13th month wage in the public sector, equivalent to 8% nominal wage decrease there and partial abolishment of the 13th month pension. The standby credit facility will involve €10bn from the IMF and further €6.5bn from the EU and €1bn from the World Bank, so total of €20bn. The announcement can be read here: http://www.imf.org/external/np/sec/pr/2008/pr08261.htm Together with the €17.4bn level of foreign reserves, Hungary will have €37.4bn credit, which almost equals total net foreign debt and fully covers the short-term gross external debt maturing within a 1-year. This means that whatever market circumstances are, Hungary will be able to repay maturing debt and refinance it for at least 12-months, implying that there is no need for capital inflow from abroad to finance the current account gap. The amount exceeds the €10-15bn market estimate, so markets could cheer about this and inves-tors may slowly look at the currency as an investment opportunity, too. The medium-term outlook is now more likely to see the recovery of the currency to around the equilibrium level of 250-255/€, but the currency may need to show some stability first. We recommend to consider opening long HUF positions in the next weeks and target 250/€ level on a 6-months horizon.

Developments in Polish markets have taken a turn for the better this week with the Hungarian situation apparently resolved and the euro on the rebound against the dol-lar in the overall improved risk appetite conditions. The Polish zloty staged a mas-sive comeback supported by the government’s official declaration that Poland would enter the ERM-2 in May or June next year, which would imply euro zone entry on Jan 1, 2012. While we keep to our stance that the risks are that EMU entry will be post-poned by a year, the political will to enter as early as possible seems sound, certainly on the government side, but also in the light the most recent volatility of the exchange rate the opposition might eventually soften it’s critical stance. The EUR/PLN shot from 3.85 in early trade on Tuesday to 3.66 today and is on the way back to levels more in-line with LT fundamentals (EUR/PLN 3.50). We think that the move is likely to be continued past 3.65 today given the rise in equity markets overnight and the weaker dollar.

The Czech Forex market was closed yesterday, but the koruna firmed sharply dur-ing off-shore trading as a stronger forint led the whole region higher. Hence, the Czech currency is stronger by around 8 % against the euro in last five days!
Today, much will depend on global markets and the forint. Should the risk aversion ease and the forint be able to extend it gains the koruna will remain strong. However, we would not bet on further gains at this stage and stay rather EURCZK long.

The Slovak central bank cut its key repo rate by 50 bps to 3.75%, in line with the euro zone rate. At the same time it narrowed the spread on O/N repo rates – it raised its sterilization rate to 2.75% (from 2.25%) and lowered the refinancing repo rate to 4.75% (from 5.75%). After the ECB cut in the beginning of October and Monday’s word of Trichet it was highly possible that the NBS will ease its monetary policy. The Slovak koruna slightly appreciated to EUR/SKK 30.47 after the decision, but it was only small move during a range-bound trading. As ECB president Trichet already an-nounced the high possibility of a next rate cut on November meeting, we can expect the same from the NBS at the end of the next month. Today, the eco calendar is empty. The koruna should further follow the same trading pattern that was seen in previous days.

Fixed income

Polish Bond yields have dropped by up to 40 bps (from 7.20 to 6.80% for the 10Y) since the beginning of the week in the rebound rally as well. Liquidity is still very tight though and price volatility remains extremely high. For now, bonds might however continue the uptrend across the curve if the zloty remains in strengthening mode to-day. The MPC rate call today will be the eye catcher – the most recent rise in the zloty cements our expectations that the Council will keep rates unchanged and switch to a neutral policy bias. This would means a tangible prospect of rate cuts early next year will appear on the table, which should be supportive for bonds particularly at the short end of the curve.

The Hungarian bond was broadly unchanged as investors remained cautious af-ter the recent turbulence and they are waiting on the sideline for a more stable envi-ronment before they consider re-entering into the market. Some have been trying to find very high yields levels like 14% amid the low liquidity, but like in the case of pre-vious crises (2003 or 2006), it was better to wait for some weeks/months as the weak currency will have a negative effect on inflation, creating risk for a second-round weakening, so risk/reward is usually better after some weeks of consolidation.

The Czech bonds traded subdued at the beginning of the week due to national Holi-day.
Today we are negative for the long end of the curve as the Czech bonds may be hit by stronger close of US equities. Nevertheless the shorter maturities can outperform the longer one. That’s mainly because of the tremendous rally on the Czech koruna that profits from better sentiment on the Hungarian forint.

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Published on  Wed, Oct 29 2008, 08:29 GMT