Polish zloty in wait and see mode ahead of retail and NBP

Headlines

Currencies: Polish zloty in wait and see mode ahead of retail and NBP
Fixed Income: NBH doesn’t surprise and keeps rates unchanged

Czech Republic

The Czech koruna was only little changed yesterday, as closed US markets delivered calmer environment. Thus, the EUR/CZK hovered around the 26.7 level effectively ignoring news afrom the new technocratic government. It is worth noting that the caretaker government, which will rule until October, approved its official program yesterday but decided to keep it a secret for now.
Today, the koruna will watch both global markets and the Polish zloty, which could be affected by an outcome of the April retail sales. Should the zloty move either after the retail sales or because of a change in global equity markets, the koruna will track the Polish currency just partly.

The Czech yield curve flattened slightly yesterday as the short end of the curve moved a bit higher. Hence, the market paid only little attention to warnings coming from the domestic FinMin that the budget deficit will be very wide (CZK 223 bn or almost 6 % of GDP). In this respect it worth noting that Finance Minister Eduard Janota released budget forecasts that call for deficits of CZK 150bn this year, CZK 165bn in 2010. Interest on the national debt would rise from CZK 54bn this year, to CZK 65bn next year. We consider these estimates as realistic, while we think that it will not be ease to absorb the implied bond supply.
In a short run, however, the trading will remain influenced by the koruna, CNB comments and sentiment in emerging and global bond markets.

Hungary

The Hungarian forint started the week in a sad mood and similarly to other key emerging currencies, it weakened slightly to 281-282 against the euro. Since US banks were absent from trading the turnover was low throughout the day and the central bank’s decision to maintain the base rate at 9.5% couldn’t generate more activity either.
The central bank also release new projections, which now match the government’s recently updated 6.7% crimp in GDP for 2009, while inflation is expected to rise to an average of 4.5% this year due to the VAT hike from the 1st of July.

The Hungarian bonds did not move at all as the relatively dovish comment from the central bank counterbalanced the effect of the weaker currency. We believe a rate cut would be dangerous for Hungary because inflation could accelerate on the tax increase and recent inflation data have also showed signs of tensions, but the council seems to have a more relaxed view about the outlook and it even discussed a lower base rate alternative.

Poland

Yesterday, the Polish zloty stayed in wait and see mode ahead of today’s retail figures and Wednesday’s NBP rate decision. Hence the pair was stuck to the 4.40 EUR/PLN during most of the session.
Today the retail figures may be the last piece of the puzzle ahead of the NBP rate decision. The domestic consumption is crucially important for more optimistic forecasters on the market including the NBP with its 1.1% GDP growth outlook for 2009. Nevertheless we are afraid the retail figures as well as consumption may be deteriorating faster than most expect, as the unemployment is on rise, the pace of real wages decline and credit availability has worsened. If retail sales come out weaker than expected the zloty may weaken. If not, it will be driven by the global risk aversion/ appetite pair

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