Poland cuts rates by 25 bps

Headlines

Currencies: CEE currencies again under pressure
Fixed Income: Poland cuts rates by 25 bps

Currencies

The Polish zloty weakened significantly on Wednesday along with other currencies in the region as the overall sentiment deteriorated again. The EUR/PLN pair slipped from 4.56 early in the day, to 4.70 late in the session and might head higher today given the dollar rebound and soft equity market performance. The NBP rate cut (more in FI part) added to the pressure but since the decision was largely priced in, we think it was not the key negative factor for the zloty. The market remains sentiment driven and low liquidity has kept volatility high. Nevertheless in the current shaky conditions the cut is likely to be seen as an inconsistency with the joint verbal intervention by CB’s to protect regional currencies earlier this week, and could be a source of additional uncertainty further out in time for the currency. Interestingly, the market took no notice of the new FX intervention rhetoric embedded in the policy statement, even though the MPC pointed out clearly, that it might use direct intervention if it is necessary to curb inflation. We believe all this suggests more weakness is to come for the zloty in the foreseeable future.

The efforts of the Czech National Bank to encourage investors to distinguish between countries in the region, which yesterday joined the Finance Minister Kalousek, at least so far do not appear to be very successful. Yesterday the Czech koruna remained for the most of the session in a relatively narrow range around 28.30. Nevertheless, EURCZK in offshore trading followed its regional counterparts and the koruna weakened back towards 28.60 EUR/CZK.

There are no important domestic data scheduled for today, and statistics from the Euro zone and USA won’t bring much optimism. We believe that the crown will remain under the influence of global sentiment, which seems currently rather negative. The Czech currency thus should remain under pressure.

The Hungarian forint had a relatively quiet day around EUR/HUF 300 and neither domestic nor foreign news had any significant impact on trading. After many days of hefty movements, participants may welcome this quietness for now and authorities also seem to be more concerned about volatility than the level of the currency.

Fixed income

The front end of the Czech yield curve reversed gains from previous days after reacting to central bankers notes that Czech rates might be raised. The 2 year yield rose 12 bps. The central segment of the curve went up to 5 bps and the long end remained practically unchanged. Therefore the Czech bonds did not react to CNB efforts to correct information about sovereign debt published by prestigious foreign papers.

No important events are published today. Therefore we do not expect any significant changes in bond yields.

The Hungarian bond market was also stable and yields remained close to the record high levels they reached last week. Foreign bond holdings still reflect unchanged positions of foreigners, thereby recent selling could have been triggered by domestic participants and the market’s reaction to the higher risk premia now attached to CE assets.

Polish bonds were little changed on Wednesday as the 25 bps. rate cut was no major surprise, but it was enough to protect the market from the impact of the weakening zloty. The policy statement which was the real eye catcher was released already after the closing, so the markets only have the chance to react to it today. The tone of the communiqué was dovish as expected, with the new staff forecasts pointing to a strong slowdown in growth (to 1.1% in 2009 and 2.1% in 2010) and inflation (to 3.3% y/y in 2009 and, more importantly, to 1.8% y/y in 2010). Given the economic evidence, it seems that if not for the weaker zloty, the Council would have gone for a much deeper cut, possibly even 75 bps. However, the outlook for rates is indeed clouded by the zloty – until the sentiment driven currency market calms down, we should see the MPC cut only cautiously (by 25 bps steps) or even stay on hold for some time. Our LT baseline scenario remains unchanged though, that the MPC will eventually lower rates to 3.0%. The cycle might be longer than previously expected though (and could go beyond Q2). This isn’t the story played by markets though - today bonds are likely to come under pressure from the weakening zloty.

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