MNB cuts rates by 50 bps in a surprise move

Headlines

Currencies: HUF strengthens in an initial reaction to MNB’s rate cut
Fixed Income: MNB cuts rates by 50 bps in a surprise move

Currencies

The Polish zloty was reluctant at first to follow the regional currencies higher despite the massive rally in global equity markets and the recovery of the euro against the dollar. In the end the EUR/PLN inched lower by roughly 0.5% on the day, which was a modest gain to say the least given the reversal move seen in the HUF and CZK crosses. The zloty’s underperformance is surprising given on the one hand the still relatively decent growth outlook and on the other, the rising interest rate differential. Oddly enough it could be the risk that the NBP will eventually fall behind the curve due to its reluctance to cut rates and support growth further out in time, that is weighing on the sentiment in the short run. The MPC meeting which will start today will be eyed closely, and could, in the end, be supportive for the PLN (more in I part).

The Hungarian Central Bank’s surprise 50bp rate cut yesterday did not hurt the Hungarian forint, but actually started another wave of appreciation after the positive performance at the end of last week. The main message of the new Inflation Report has been that inflation could fall to 1.7-1.8% in 2010 meaning that there will be a substantial risk that inflation target could be well undershot. In order to lower the risk of this scenario the central bank has started the easing cycle earlier and just a month after the 300bp rate hike on October 22 that was aimed to defend the currency. The main question is whether market will see this approach credible If so, we could see a stable currency or even a further appreciation into the EUR/HUF 250-260 range, which is seen as the fair value level of the forint. The high real interest rate now offered by bonds could become more attractive and capital inflow could restart to the bond market, while the low inflation could help to rebuild the confidence in the currency. Overall, the sharp currency recoveries of Spring 2004 and late 2006 could repeat this year and into early 2009 again. The risk is that the central bank’s scenario does not gain credibility and that the currency’s stability will be questioned by markets. This would risk the return of volatility, a weak forint and more capital outflow. For us however, the inflation outlook is also seen highly positive, so we would bet that the central bank’s easing cycle could have started.

The Czech koruna tracked the other regional currencies higher as higher equity markets boosted sentiment in all CE markets. Hence the EUR/CZK pair slipped from its opening level to 25.30, while it closed at the 25.38 level. The Czech koruna was able to firm despite the fact that the IMF lowered its expectations for Czech GDP growth to below 2%, mainly because of lower eurozone demand. Recall that the IMF estimate belong to the most pessimistic ones among analysts (we still stick to our 3 % GDP growth scenario).
Today, the domestic calendar is empty, but in any case the koruna (as it is a rule these days) will rather look to Hungary and equity markets for further direction. To extend yesterday’s gains will be, however, a tough task.

The Slovak koruna held stable yesterday in an extremely tight range close to EUR/SKK 30.42. It showed no reaction to the news that the government agreed to increase the 2009 public finance deficit to 2.1% from 1.7% of GDP. The government had no other possibility – to sustain lower deficit was nearly impossible on the back of the global crisis, ongoing recession in the euro zone and expected deceleration of the Slovak economy. Of course, there was also the possibility to lower expenditures, but this was not political acceptable. The new forecast is more or less in line with ours – we assume the deficit at 2.2% of GDP. Today, the central bank has its regular meeting. As we suggested yesterday, the bank should keep its powder dry this time and thus we do not expect any market reaction. The koruna will further oscillate close to current levels.

Fixed income

Polish bonds shot lower by up to 15 bps across the curve in the unexpected risk appetite rebound run yesterday. Gains were the greatest for longer maturities as the curve flattened somewhat in a bullish fashion. The sentiment should remain positive today given the strong equity market performance and the likely catch-up strengthening move from the zloty in the days to come. The MPC meeting which starts today will get ample attention tomorrow. We see no cut as the favored scenario, but look for an outright dovish communiqué, which would underline the MPC commitment to start lowering rates in the months to come and should be positive for bonds, particularly at the short end of the curve.
The Hungarian bond market benefited from the favourable currency performance and given the very positive inflation outlook there might be additional gains in the months to come. Money market has priced in 100bp rate cuts for next quarters, which could mean that the full 300bp rate hike could be taken back by the end of 2009. Bonds are still offering fat yields of 11-12% at the mid-part and 8.5-9.5% at the longend, which could attract more and more investors in the next weeks.

Czech bonds were as usual hit by the stock markets’ rise, but their losses were small compared to gains of global stocks. Yields at the long end rose only by around 5 basis points, while trading volumes were relatively high. It is also worth mentioning the announcement of price rise of electricity and gas rates for the next year. It seems that the main suppliers’ (CEZ and Transgas) ambitious plans to raise prices of energy and gas will not be fully realized, which is positive for inflation outlook. According to our view the headline inflation can fall below 2% next year.
Today with the absence of any Czech data, bonds will look for inspiration abroad and most probably will follow its European counterparts while it will be awaiting tomorrow’s bond auction.

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