Polish net inflation in focus

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Currencies: Polish zloty leads regional losses as industrial output slumps
Fixed Income: Polish net inflation in focus

Currencies

On Tuesday, the Polish Zloty extended its decline against the euro. The global negative market sentiment continued to weigh on the region in general. In the afternoon, markets did keep a close eye on the Polish data. Producer prices came out slightly higher than expected, but production data came out much worse than expected at -3.7% M/M and -4.4% Y/Y. The zloty reached a new cycle low in the 4.3850 area at the time of the publication of these data. However, there was no follow-through selling and later in the session EUR/PLN settled in the 4.3250/4.3750 area in volatile trading. In a statement the government said that the euro roadmap is flexible and open. Finance Minister Rostowski expressed the government’s intention to keep the budget under strict control this year, indicating that attempts to boost economic growth with fiscal stimulus would be counterproductive.

Today, the net core CPI data are on the agenda. The trend for the zloty remains negative. However, in a day-to-day perspective there are some tentative signs that the pressure is easing. A technical correction on the recent zloty decline is possible.

The Czech koruna tracked regional losses during most of the yesterday’s session. Losses were primarily led by the Polish zloty, which was negatively surprised by sharply lower industrial output. Beside that, also the sell off on global equity markets weighted on regional sentiment. The koruna weakened close to the 28.00 EUR/CZK level, but succeeded to trim most of the losses later during the day. Today, we believe in calmer session and the koruna could stay in tighter range. Nevertheless in the near future we see the space for further weakening up to 28.22 EUR/CZK.

Yesterday, the Hungarian forint set a new record low at the level of 288.40. Trading however was surprisingly calm and the pair followed the Polish unit closely during the day and finished in the 285-286 range. Analysts are citing that the current level of the currency is tolerable for the central bank as the inflation path is seen deeply below the 3% threshold for the next 8 quarters.

Fixed income

On Tuesday, the steeping trend on the Polish interest rate curve continued with short-term yields declining a few basis points while the longer end of the yield curve showed marginally higher yields. One might expect this steepening trend to continue, driven by rate cut expectations. In a day-to day perspective, a stabilisation in the zloty and the government commitment to contain the budget deficit might limit the damage at the long end of the curve.

On Tuesday, Czech bonds, in average trading volumes, stayed broadly unchanged. Both ends of the yield curve gained up to 1 bps, however the middle segment lost nearly 6 bps. Low November’s retail sales had almost no impact on the market. No important domestic events are expected today. Nevertheless, rather high yields at the front end of the yield curve could be interesting for investors especially when at least one rate cut is expected and the yield curve could steepen.

The Hungarian bond market remained quiet and prices remained unchanged for the second day. Rate cut expectations are still cemented, while demand for bonds fell to a low level. Newspapers have been writing several stories about possible tax changes, including higher VAT and lower personal income tax rates. Higher VAT would be negative for bonds as it would boost headline inflation, except if market ignored the direct effect and focuses on the indirect effect, which could be antiinflationary given the low purchasing power of households.

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