Polish inflation expected to stay at elevated levels

Headlines

Currencies: The koruna should monitor whether Parliament dissolves itself
Fixed Income: Polish inflation expected to stay at elevated levels

Czech Republic

The Czech koruna developed a sideways trading pattern yesterday, as it is quite usual in these days. The koruna shrugged off both the July retail sales and dovish central bank talk and the EUR/CZK pair continued to hover around the 25..500 level.
Today, the main domestic event will be the debate in Parliament this afternoon. Deputies try to dissolve the lower house and to allow earlier elections to be called. Although it is likely that there will be enough votes for such an action, it is not sure whether the early elections will be postponed really to early November, because today’s decision might face another constitutional challenge addressed to the Constitutional Court. In such a case it is quite likely that elections might again be postponed and a regular term (June 2009) will be on the agenda. Let us add that we do not favor this scenario, because it might postpone the approval of the 2009 public budget and moreover necessary expenditure cuts.

The Czech yield curve steepened in a bullish fashion yesterday as dovish talk from CNB Bank Board helped. The front end of the Czech yield curve also appreciated news about cuts in electric energy prices, which should drop by around 7 %.at the beginning of the next year. This will further reduce the headline inflation by around 0.25 percentage points.
Today, the release of the August PPI report, which showed surprisingly that prices advanced 0.2 % m/m, will hardly alter the overall positive trend in the Czech fixed income market. On the other hand some pre-positioning ahead of tomorrow’s auction might occur, which might bring (together with today’s PPI)small negative correction at the short end of the curve.

Poland

The Polish zloty got under pressure and weakened as far as 4.24 EUR/PLN at the beginning of yesterdays session. After budget woes also the nervousness around Lehman anniversary weighed on the Polish market. Nevertheless the zloty paired most of the losses later on as the US equities turned to positive territory. The pair came back below the crucial 4.21 EUR/PLN resistance level – 2008 highs. The Deputy Finance minister said that the recent zloty fall were not significant and were driven mostly by poorer global sentiment towards emerging markets. Nevertheless what we found more interesting are the comments by moderate dove Andrzej Slawinski, who thinks that further interest rate cuts are unlikely. That is another strong argument for a no-change scenario till the end of the year. The government yesterday confirmed the market view that any serious debate about fulfilling Maastricht criteria for euro adoption cannot start before 2010-2011.
As the pair failed to stay above 4.21 EUR/PLN and the sentiment on the global markets may stay positive for a while, we stick to our bullish scenario for the Polish zloty. The CPI figures should not bring surprises staying at elevated levels above 3.5%y/y. Hence the attention should be on US retail sales scheduled for early afternoon.

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