Polish inflation extends decline

Headlines

Currencies: EUR/CZK tests the key resistance at the 28.80 level
Fixed Income: Polish inflation extends decline

Currencies

The Polish zloty was hard hit by renewed risk aversion on Thursday. The weak eurozone IP numbers along with uncertainty regarding the US bank bailout fueled the softness in equity markets and spilled over to other markets. The EUR/PLN pair edged higher by 10 big figures to test bids in the 4.65 area only to return to the 4.60 overnight tracking the weaker dollar and slightly stronger equities. The current account numbers were ignored, as the headline deficit came in broadly in line with expectations at EUR 1920 bn. Both exports and imports growth dropped massively into double-digit negative territory though, which suggests that the impact of the deterioration of foreign demand might have a stronger impact on growth than previously expected. Meanwhile, it’s the global sentiment rather than economic news that remains the decisive element of the picture for the zloty. We could see the PLN recover somewhat further early today as Asian stocks ended the session on the upside, but at the end of the day it will be up to US markets to lead the way for the currency.

The Czech koruna slipped to fresh three-year lows yesterday as the currency still copes with risk aversion in global markets. Moreover, the market had to digest another negative macroeconomic news item, which was the December C/A balance. It was in deep red as the deficit reached more than CZK 20 bn. Hence, the EUR/CZK pair tried (unsuccessfully) to test the key resistance standing at the EUR/CZK 28.80 level. Today, the kick off for trading could be the release of GDP data for the last quarter of 2008. The first GDP forecasts for the last quarter of 2008 should confirm the expectations of a rapid deceleration of economic growth. Most likely, the economy even fell by more than 1% Q/Q.

The Hungarian forint remained in the range of 297 and 300. The currency was not able to break the 300 level overnight either, which could suggest the possibility of central bank intervention there. Today’s GDP data was below expectations at -2% Y/Y, pointing for a deeper recession that the government’s recently revised 2.4% estimate in 2009. We have lowered our forecast to -3.9% for this year, which looks plausible after the Q4 data. A deeper recession could keep pressure on the currency to weaken further and the budget may also see higher risk of larger revenue loss.

Fixed income

Polish Bonds continued to lose ground in a massive profit taking move which got off to a jump start earlier this week. Apparently, the market is looking with increasing doubts toward the prospect of deep rate cuts. Naturally the weakness of the currency has been the driver for the reversal in sentiment. Meanwhile, the economic arguments seem overwhelming. Inflation is not an issue anymore and growth prospects have deteriorated to a point where strong policy action seems warranted, even though the transmission mechanism is still not working properly. This said it seems that a 50 bp cut at the February meeting remains a valid scenario, under the assumption that the data for January turn out to be as sot as we (and the market) expect them to be. The January CPI at 14:00 CET today will be the first high-profile release of the month. Despite the weakening of the zloty we are looking for a strong drop in inflation from 3.3% y/y in December to 3.0% y/y last month. Both food and fuel prices as well as core inflation all contributed to the drop. The risks this time are skewed to the upside though, given the uncertainty regarding the annual hike in regulated prices and taxes on alcohol and tobacco. The FinMin, which has superior knowledge on excise tax, estimates the CPI at 3.2% y/y, while the market consensus stands at 2.9% y/y. Any reading below 3.2% y/y, would be positive for bonds, as this would reinforce the expectations for monetary easing, which have recently taken a hit from the weaker zloty.

Despite interesting activity in the forex market, the Czech yield curve was only little changed yesterday. Actually, the curve flattened a bit, but the move was negligible. While GDP figures might be another interesting input for the market, we do not believe that they will bring a fundamental change of yield behavior. In this respect, more interesting should be the CNB Minutes, which should unveil the last voting within the Board (note that for a 50 bps rate cut were 4 members, 1 was for 75 bps and one for 25 bps).

The Hungarian bonds did not move much after AKK sold Ft20bn of bonds through auctioning 3-year, 5-year and 10-year papers. Demand was slightly above the supply, but given the small size this may not have any significant information about the depth of the market.

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