The CEE currencies shrug off S&P's rating downgrade

Headlines

Currencies: The CEE currencies shrug off S&P’s rating downgrade
Fixed Income: S&P’s lowers Hungary’s rating from 'BBB+' to 'BBB'

Currencies

The Polish zloty fell back to the upper bound of the current EUR/PLN 3.60-3.80 range on Monday as softer equity market performance weighed on the sentiment. Liquidity remains low and single larger transactions tend to lead to excessive exchange rate moves. The wide technical range mentioned above should hold today, but the risk is skewed to the upside for the EUR/PLN in the short run given the persistent uncertainty lingering in global markets. The calendar heats up today (more in FI part) but local data are hardly any market mover at all at this stage.

The Hungarian forint started the week in less optimistic sentiment and the pair neared the key EUR/HUF 270 level again. S&P downgraded Hungary’s sovereign rating to BBB from BBB+ and maintained the negative outlook. This has been the worst rating so far as Moody’s downgrade still means two-notch higher rating at A3, while Fitch canceled the negative outlook after cutting it to BBB. This is no good news. The market seems to be following the general emerging market sentiment, and therefore the forint has not underperformed other currencies in the last 10-days (during the downgrades which suggests that market has already priced in a lot of bad news). In the meantime the Parliament accepted the medium-term fiscal rule that will curb spending, debt and primary balance between 2009 and 2011 guaranteeing that fiscal loosening will not follow next year’s tightening.

The Slovak koruna had a mild tendency to depreciate ahead of the long weekend. There is no important macro data scheduled for this week. The only interesting event is the release of the unemployment for October. We expect calm trading.

Despite the fact that there was a national holiday in the Czech republic, the Czech koruna weakened a bit to the 25.46 EUR/CZK level as the koruna tracked the rest of the region. However trading volumes were very low during off-shore trading. Today, September retail sales are scheduled for release, but it will hardly have any impact on the Czech currency, so the focus will be again on global regional sentiment. In our view the Czech koruna might further extend its yesterday’s losses.

Fixed income

Polish bonds inched slightly lower in yields (following the drop in swap rates) but activity was negligible so we would not draw any conclusions from the recent price action. The eco calendar heats up today, as both the October wage and employment numbers are on the agenda. Local data have little market moving potential at this stage, but the release will be eyed closely as the market speculates on the (rising) possibility of a rate cut already this month. We are looking for a single digit consensus- like 9.5% y/y rise in corporate wages, but the risks are skewed toward a softer reading given the high statistical base and ongoing slowdown in economic activity. The latter should be visible in the (softer) employment numbers. Our estimate points to a sub-consensus 3.4% y/y outcome compared with roughly 4.0% y/y in Q3 and 4.8% y/y in Q1-Q3. Leading indicators point to further weakness in the labor market - we are looking for employment growth to slow to 3.0% y/y by the end of the year, while wage growth is likely to moderate to 7-8% y/y by then, both of which should facilitate for rate cuts in the months to come.

Hungarian bonds were mixed with the long-end performing better, while the short-end weakened. Yields are still very high at 12-13% between 1-year and 5-year maturities and latest data about foreign bond holdings also showed some further selling. These data are available daily and shows the latest settlement, implying a transaction date two working days before.

The Czech fixed income market will re-start trading after the extended weekend. Trading is expected to be rather thin in the Czech bond market as it might slip into a wait-and-see mode ahead of tomorrow’s bond auction (8Y floater benchmark).

•   Download Full Central Europen Daily