Polish inflation probably declined further in September

Headlines

Currencies: Contagion from Romania put CE currencies temporary under pressure
Fixed Income: Polish inflation probably declined further in September

Czech Republic

The Czech koruna together with other Central European currencies lost slightly on Tuesday and the currency pair EUR/CZK closed a little below ERU/CZK 26.00. Worries about possible CNB actions against the koruna were reinforced by a decline of the Romanian lei after the government did not survive non-confidence vote.

The weaker greenback has not had any strong influence the koruna. If investors manage to forget the political turmoil in Bucharest, the Czech currency could profit from the weak dollar and correct part of its previous losses. On the other hand, the August retail sales released this morning did not bring a big surprise. Consumers still postpone their purchases, only food sales increased. As unemployment continues to go up retail sales could hardly improve in a short term horizon. Nevertheless, lower retail sales are another reason why the Czech CPI is low and may support a CNB decision to cut rates in early November.

Hungary

The Hungarian forint did not continue its appreciation trend on Tuesday and after hitting the EUR/HUF 267.50 level again in the morning the pair corrected to 269.50. Positive sentiment on equity markets helped the currency to retest the 267.50 level overnight, thus the next question will be whether it will be able to go beyond this level or whether it will resume previous week’s narrow range around the 270.00 level.

Yesterday’s main news was the better September inflation data, which came in at 4.9% Y/Y, below consensus expectations again. The larger seasonal drop of fruit and vegetable prices was behind the better figure, but low inflation of services continued as well. The latter could be good news for the outlook as services inflation has been high in Hungary for years. The recession helps on this issue, achieving price stability and the 3% inflation target on a sustainable basis would be fairly good news.

This morning’s revised industrial production data at -19.8% Y/Y matched the preliminary estimate of -19.9% Y/Y. It should be ignored by the market.

The Hungarian fixed income had a very good day yesterday as the stable currency together with hopes for a global recovery lured investors back into Hungarian bonds. The long-end advanced most of around 20bps in yield terms and the 10-year benchmark yield shrank to 7.47%, a new low since the start of the crisis. The shorter-end also dropped further to 6.60% as demand for the 3-month T-Bill was strong and auction cut off yield decreased. Interestingly, the FRA market continues to see the bottom of the easing cycle at 6.00% over the next 6-months. Thus bonds are outperforming the swap curve as the ASW spread has been narrowing. ASW spreads at the long-end is still 100bps wide, so there is ample room left for further compression.

Poland

The Polish zloty temporary lost ground yesterday as it felt some contagion from the weakening Romanian currency. Recall that The Romanian parliament defeated the minority cabinet at yesterday’s no-confidence motion, which has created uncertainty around country’s ability to cooperate with the IMF (Romania draws EUR 20bn standby loan). As a result the EUR/PLN temporary bounced to the 4.24 level. Nevertheless the released August low C/A deficit (just EUR 69m) provided some support to the zloty.

Today, the eye-catcher will be definitely the September CPI report. It should show a decline in year-on-year inflation. The inflation outcome should not, however, alter our expectations that the NBP will stay on hold for foreseeable future.

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