CEE currencies stronger thanks to equity gains

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Currencies: CEE currencies stronger thanks to equity gains
Fixed Income: NBP surprises markets by cutting rates

Currencies

The Polish zloty traded flat, below EUR/PLN 3.80 on Wednesday with all eyes on the MPC rate decision (more in FI part). The rate cut was ignored by the PLN and while the dovish rhetoric suggests an aggressive easing is in store in the months to come, this could bolster confidence in economy, hence providing support for the currency. The outlook for the rest of the week remains moderately positive for the zloty with equity markets likely to be the driver for trading.

The rise of global equities might help the koruna to extend its gains. The positive trend was not even broken by the decision of the NBP to cut interest rates by 25 bps. Nevertheless the pair failed to stay below the crucial 25.00 EUR/CZK level. We do not expect new data today. Furthermore US markets are closed in observance of Thanksgiving and therefore we believe trading will be very calm and sideways (above 25.00 EUR/CZK).

The Hungarian forint remained stable for the second day and the pair continued to trade within the range of 259 and 262. The market has accommodated to the better inflation prospect in recent days, while lack of interest from foreign investors could keep trading quiet.

The Slovak koruna oscillated in a tight range above the level of EUR/SKK 30.30 yesterday untouched by the regional or global sentiment. We can expect more of this trading pattern today as the eco calendar is empty and there are no other important events scheduled. With the end of the year coming near, the koruna should gradually approach to the conversion rate of EUR/SKK 30.126.

Fixed income

In Poland, the MPC decided to cut rates by 25 bps to 5.75% yesterday, contrary to our expectations that the cost of money would remain unchanged until early next year. While most analysts had bet on a no change verdict, the risk was clearly to the downside hence the rate reduction was not that much of a surprise. Moreover an 80% chance of a cut had already been price into the market before the decision was announced. Both the bond and swap curves headed lower in yields in an extension to the move which got off to a start earlier this week. While some corrective action could be in store for longer maturities if risk appetite deteriorates, the market should remain in positive mood in the short term. Regarding the MPC vote with at least three doves including the NBP president Stanisław Skrzypek and moderate Jan Czekaj openly in favour of a cut it took only one of the remaining median voters (Sławiński, Nieckarz) to tip the scale. Interestingly, both had indicated quite clearly ahead of the meeting that the start of the cycle should take place in Q1 2009. What did then foster the change in attitude? First and foremost, data from the real economy have been weaker than expected recently and growth estimates have been under constant revision since the last meeting in October. This in turn has improved the perception of inflation risks up to a point where cuts were seen appropriate. Secondly, those rate setters who had been afraid that aggressive cuts would be a threat to the zloty, received an important piece of counter-evidence from the HUF which strengthened earlier in the week after he NBH unexpectedly cut rates. The policy statement was outright dovish as expected, with only minor references to the still elevated level of wage growth, which was however expected to moderate in the quarters to come. We keep to our view that rates will fall to 4.50% before the end of H1 2009, with the next cut likely already in December. This suggests downside pressure on rates is likely to persist, particularly for shorter maturities.

The Czech bond market was again very quiet and trading volumes were below average. Yields at the short and middle segment of the curve followed their European counterparts and fell slightly, but again the movement was relatively small between 2- 4 basis points. Also demand for three-month repo facility offered by central bank was very low, which was however no surprise given the fact that market participants are expecting rate cuts to come soon.Today we expect that the situation at the Czech bond market should remain very calm. There are no data scheduled and we believe that again yield movements will be limited.

Hungarian bonds moved stronger again and yields lowered another 20-40bps on the back of the better outlook for inflation that sees inflation at below 2% in 2010, well under the 3% medium-term target. Foreign investors however are reluctant to buy. The daily data of total foreign bond holdings has been stable at Ft2570bn. Sentiment is similar to the currency market, therefore trading could become calm in the next days unless better global equity performance leads to some risk taking.

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