Polish governor warns credibility hinges on ballooning deficit

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Currencies: Czech Constitutional court rules out shortening of the election period
Fixed Income: Polish governor warns credibility hinges on ballooning deficit

Hungary

The Hungarian forint continued its easing trend on Thursday and the pair slid to as low as 273.50 at noon after demand for bond auctions appeared low. The USD drop helped the forint to recover to around 272.00 overnight, but this morning’s betterthan- expected CPI data could keep the currency vulnerable towards further weakening as it could lengthen the easing cycle. The August CPI came in at 5.0% Y/Y, well below analysts’ expectations for a 5.8% Y/Y reading as the VAT and excise duty increase in July was not passed on fully to consumers. A better inflation outlook could mean that the monetary easing cycle could last longer and the base rate could fall deeper, which may allow the currency to weaken in the coming weeks.

The Hungarian fixed income market had a bad day as demand on the auctions was disappointing and post-auction trading saw significant rise of yields. The mid-part of the curve lost the most of about 15bps, while the short-end remained anchored to the 7.50% level. It seems that the Hungarian market has lost its attractive status and investors became increasingly defensive as the global rally looks to be slowing down and domestic fundamentals contain little room for further improvement. Inflation net of taxes fell to 1.2% Y/Y in August, well below the central bank’s 3% target and the IMF statement also reinforced positive fundamental developments. In the coming weeks however, the market may have to cope with a possible bigger revenue shortfall for this year and although we are sure that the Finance Ministry has enough spending reserve to deal with it, new risks may not cheer the markets.

Czech Republic

The Czech koruna was virtually unchanged yesterday as positive sentiment for risky assets was matched with a decision of the Constitutional Court. Yesterday, the Court ruled that a one-time shortening of the term in office of Parliament is not possible. Elections might not be possible on October 9-10 and it looks very likely that they will be held on November 6-7, because Parliament is expected to give final legislative approval today to a constitutional amendment for allowing Parliament to dissolve itself. This will open the way for elections, though it might happen that even this change of the Constitution might be challenged. In such a case the elections will not be in November and a regular term (July 2010) should then be considered. Clearly, such a scenario would be negative, especially if it were coupled with Parliament’s impotence to pass the 2009 budget law and necessary expenditure cuts.

Today, the market might check the C/A figures, which could be quite positive given the already released trade balance figures. The koruna, however, stays in its sideway mode and we do not expect that it will change at the end of the week.

Concenring the Czech fixed-income market, the decline in FRA rates and short swaps stopped yesterday. The market digested easily Wednesday’s comments from Czech central bankers and the decision of the Constitutional Court.

Today, the domestic calendar contains some second tier releases; hence the market will rather watch the core markets and the koruna. In our view, given our expectations for the CNB policy we still see room for a decline FRA rates and short swaps.

Poland

The zloty weakened further on Thursday. The Polish currency was hit by negative reports from rating agencies on the banking sector and by continuing woes around the 2010 budget. Governor Slawomir Skrzypek warned on credibility hinges on a ballooning budget deficit. Standard & Poor‘s warned in report that Polish banks are vulnerable to credit risks because of the slowing economy. Although it is nothing new and S&P says it is unlikely to change the current positive rating, the news triggered somekind of technical sell off on the Polish market. The pair shot up as high as 4.18 EUR/PLN despite rather favorable development on the core markets.

We believe that the zloty could appreciate at the end of the week. We consider both budget and rating talks short term factors that should not change our bullish view on the Polish currency.

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