NBP rate cut triggers limited sell off on the CEE currencies

Headlines

Currencies: NBP rate cut triggers limited sell off on the CEE currencies
Fixed Income: Central European bonds were supported by the Polish rate cut

Currencies

Following a strong start yesterday, the Polish zloty came under pressure from the unconvincing performance of global equities and the deeper than expected rate cut by the NBP. Consequently, the EUR/PLN pair again tested bids in the 3.40 area at the end of trading. The government, which until now had been far too optimistic on growth and budget income this year, acknowledged yesterday that economic performance might be much weaker than preciously expected (growth of 1.7% y/y and inflation at 1.9% y/y was quoted as the worst case scenario). This would entail lower budget income of roughly PLN 17 bn and is at the same time the target for expenditure cuts. The apparent commitment to fiscal discipline along with the far more realistic macro assumptions should be supportive for the PLN in a longer term perspective. Hence, while trading remains volatile which is likely to remain driven by sentiment rather than fundamentals, we could see the zloty recover somewhat in the days to come.

The Czech koruna managed to stay relatively stable after NBP interest rate cut that triggered selling on the neighboring Polish market. Later during the day it profited from the positive development on the global equity markets. Beside that, also moderately hawkish comments from central bank governor Tomsik could have helped the Czech currency to come back to the 27.60 EUR/CZK. “The koruna depreciation will have an effect on inflation and we have to count on it” said Tomsik in an interview for Bloomberg. We believe the current moderately positive sentiment could prevail on the markets today. On the other hand, investors should be cautious and we do not see space for the reversal of the current bearish trend. Hence the pair should not fall below crucial supports at 27.38 EUR/CZK.

The Hungarian forint stabilized in the 283-288 range as the bigger-than-expected Polish rate cut triggered another, but modest, selling wave on the Hungarian currency market. Apart from this, the market was generally quiet and the ongoing discussion about the tax package did not bring any new information. Daily newspaper Nepszabadsag wrote that government could raise VAT rate by 3pp to 23% and cut personal income tax by 5pp. This would significantly increase the inflation path by about 2- 2.5pp to around 5% by the year-end and could change the current optimistic rate cut expectations. Less rate cuts in the future however could help the currency to appreciate in the coming months, hence the forint outlook could be more positive.

Fixed income

Polish bonds had a strong session on Tuesday after the MPC cut rates by 75 bps, (compared to the official consensus of 50 bps) and issued a dovish policy statement, in which growth concerns by far outweighed the residual inflation concerns. The threat of the zloty weakening further was mentioned as well, but this was not seen a major threat to inflation against the backdrop of the quickly deteriorating economic conditions. The main message seems to be that further aggressive cuts await down the road, with the next hefty reduction (we bet on 50 bps) likely already at the February meeting in reaction to the revised staff projections and continuing signs of weakness from the economy in January. With our target low in the cycle at 3.0% for the official rate we see ample room for drop in bond yields at the short end of the curve (2Y is currently at 4.7%), if only global risk appetite and liquidity conditions improve again.

The Czech bonds, in average trading volumes, eased yesterday. The middle and long part of the yield curve gained up to 15 bps influenced by eurozone markets. No important events are scheduled today. Expected rate cut could push yield at the short end down again and longer maturities may follow eurozone markets.

Hungarian bonds rallied with the Polish rate decision and yields lowered around 10- 15bps. Foreign investors demand however seems to have been decreased as their holdings remained unchanged at Ft2657bn. News about a possible VAT increase could hurt the bond market in the coming days as the market could take back some of the expected rate cuts.

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