Polish inflation on downward path

Headlines

Currencies: Hungarian forint and Czech koruna continue to cede ground
Fixed Income: Polish inflation on downward path

Currencies

The Polish zloty traded flat on Wednesday despite the massive sell-off in equity markets. Interestingly, despite the apparent deterioration in general sentiment, the EUR/PLN was immune to PM Donald Tusk’s softer wording on EMU entry in 2012. The Prime Minister, who met with Jean-Claude Trichet yesterday to discuss the issue, acknowledged that while he believed the euro road map was a feasible plan it would take a wide political consensus to change the constitution and enter the ERM-2 midway next year and to join the Eurozone on Jan 1. 2012. Otherwise, the PM admitted, EMU entry might have to be postponed by at least a year, which is our baseline, marginally more likely scenario. We treat the PLN’s resilience as a clear sign that so far the market has not been overly optimistic on the proposed timeframe. Nevertheless the risk is that the zloty will come under pressure today. EUR/PLN 3.80 is the next hurdle, which if broken, would leave the road open to recent highs in the 3.85- 3.95 area.

In spite of the fact that the Czech koruna yesterday started the session stronger than on Tuesday, negative sentiment on global markets (particularly stronger USD) pushed the currency towards weaker levels. Later in the session the koruna finally broke above the barrier 25.50 EUR/CZK. The market virtually shrugged off poor September’s C/A figures (the marker expected the deficit should reach CZK 2bn, while the actual figure was CZK 11bn). Today the Czech economic calendar is empty. Mood is not very positive after the downgrades of several countries and on top of that, sharp falls in global stock markets indicate that global risk aversion is still rising. In such an environment investors usually do not differ between countries in the region thus the Czech currency might be hit as well.

The Slovak koruna oscillated in a tight range of EUR/SKK 30.44 – 30.51 yesterday lacking any impulses. Yesterday’s data showed that the inflation decelerated to 5.1% Y/Y in October from 5.4% Y/Y in September. In the coming months we will see a further fall in inflation and at the end of this year we should be at 4.6%. The statistical basis will play an important role and together will lower fuel and food prices should help push the inflation down. From the central bank point of view, the inflation plays no role anymore, as the monetary policy setting is dependant on the ECB steps. Today, the eco calendar is empty. The koruna should trade further sideways.

Fixed income

Low liquidity remains the key issue for Polish bonds as yields continue to climb along with the weakening of the PLN. With very few transactions actually taking place the market remains transaction driven, with the sentiment dependant on the direction in the FX market and the level of global risk aversion. This said, fundamentals are set to be less of an issue for traders. The October CPI numbers later today (14:00 CET) would normally be the highlight of the week. We are looking for a consensus-like 4.2% outcome, 0.3 pp lower than in September, with the risks skewed to the downside, which should be good news for the short end of the curve. Nevertheless if the PLN continues to slide a softer inflation reading might be only enough to protect the 2Y segment from deeper losses.

Activity in the Czech bond market remains very low. Yesterday, with trading volumes significantly below the average, yields movements were not very large. Yields went slightly down at the short and middle segment of the yield curve and in spite of global stocks fall the long end of the yield curve ended the session 5 bps above the Tuesday’s closing values. Today, we do not see the global sentiment rosily, which should be in theory positive for bonds, but a weaker koruna might eventually block any gains. Due to low activity in the Czech bond market we believe that possible gains of bonds will be limited as well.

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