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Central European Daily

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NBP stay on hold, no change on the horizon

Thu, Nov 26 2009, 09:19 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Polish retail sales weaker as labour markets deteriorates
Fixed Income: NBP stay on hold, no change on the horizon

Poland

The NBP kept its base rate unchanged as expected and everything points to the midterm stability of the rates. The comments after the meeting were balanced and it looks as if there is no intention to change the neutral bias at least till the beginning of 2010, when new members are expected to enter the board. The retail sales figures came out weaker than we expected, mainly because of renewed deterioration on the Polish labor market. The Polish unemployment is starting to climb as positive seasonal effects of surprisingly strong construction vane out. The retail sales were weaker mainly due to a slowdown in sales of cars and household goods. Hence households are clearly more cautious and it points to slower domestic demand at the end of the year.

The zloty more or less ignored the domestic news. Driven by the weak US dollar, the EUR/PLN pair tried to get below 4.10. Today the session should be calm, but in the sessions ahead the zloty may profit from the technical breakthrough on EUR/USD and USD/JPY.

Hungary

The Hungarian forint followed the emerging markets’ sentiment and had a U-shaped trading day. The pair initially strengthened to 267.10 in the morning, but the weaker dollar triggered position closing and the forint began to weaken in the afternoon again the euro. By this morning it has lost about 1% and was trading at 269.00.

Apart from this, the central bank released the new inflation report with updated forecasts. The new scenario sees inflation lower over the next couple of months, but because of more elevated fiscal risks in the years of 2010 and 2011, it kept the previous, otherwise optimistic, inflation forecast unchanged for the longer-term. This means that the baseline scenario sees inflation around 2.0% in 2011, well below the 3% target. The budget deficit however is seen now above the target both for 2009 and 2010. For this year the expected overshoot is minor at about 0.1-0.2%, but for next year it could be as high as 0.7% at the underlying level and could reach 3.5%(!) with debt consolidation. These are pretty high figures and could contribute to the current negative sentiment on the market.

Czech Republic

The Czech koruna moved in a close range around the EUR/CZK 26.0 figure still missing strong stimuli to move from this level. Even renewed weakness of the USD did not trigger significant price action. However, the koruna weakened this morning and it has just extended its underperformance against the zloty and the forint in recent days. We still do not consider these losses against koruna’s regional PEER’s as fundamentally reasonable. So we would look for some koruna’s outperformance against zloty or the forint in coming days or weeks.

The Czech bond market still shows only little activity while the yield curve volatility has remained very low too. Interestingly, the front end of the curve still shrugs off the weaker koruna in recent days (weaker than the CNB inflation model implies) and FRA rates tend move rather lower than higher.

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Published on  Thu, Nov 26 2009, 09:29 GMT