EUR/PLN bounces back above 4.0-level

Headlines

Currencies: EUR/PLN bounces back above 4.0-level
Fixed Income: New CNB’s inflation projection could send slightly hawkish signals

Czech Republic

The Czech koruna tracked again the zloty and eased yesterday. There were no moving factors, hence the EUR/PLN developments were once again the key factor for the Czech currency. Today, all eyes will be on the Czech National Bank, which holds its interest-rate-setting meeting. No change in the official rate is expected, but the new macro projection could send some slightly hawkish tone through a bit higher implicit trajectory of short-term interest rates. This might temporary support the koruna, which has been still weaker than the CNB assumed in it previous Inflation Report.

Probably some pre-positioning ahead of today’s central bank meeting might lead the Czech swap curve higher as they moved by around 2 bps higher yesterday. Today, beside the ECB meeting, the domestic market will definitely focus on the CNB Bank Board meeting. The Bank board members will discuss the new inflation forecast. The economic outlook is improving slightly and inflation forecasts are moving moderately up due to the VAT consumption tax changes. However, we don’t expect the CNB to change rates in the first half of 2010. The central bank will be careful and won’t tighten monetary policy until the recovery of the economy will be more stable and sure.

Household consumption as well as investment continued to go down. Only export demand and changes of inventories might be the main driving forces of economic growth this year. The central bank should not be afraid of demand-driven inflationary pressures or second round effects of the administrative price changes. On the other hand, some board members announced that the CNB would be one of the first central banks in Europe to hike rates. However, it’s too soon and therefore a wait-andsee policy is the most probable scenario for the first half of the year. Nevertheless, it does not mean that a rise in short-term rates is excluded. The new macro projection could send some slightly hawkish tone through a bit higher implicit trajectory of shortterm interest rates. This might lift the short end of the curve higher.

Poland

The Polish zloty weakened on Wednesday coming back slightly above the important 4.00 EUR/PLN barrier. Weaker global sentiment was the main driver of selling pressure. Worries over debt in the eurozone from Greece to Portugal and Spain continued with a clear negative impact on risk aversion. The zloty lost the most as it has been the biggest gainer recently.

We were quite surprised how easily the pair came back above 4.00 EUR/PLN. That puts into question our recent conclusion about final break through that barrier. If we do not see the come-back below 4.00 EUR/PLN by the end of the week the short term perspectives for the zloty can deteriorate pretty fast as many market players are currently long in zlotys. The domestic scene is empty and hence the main attraction should be the Friday US payrolls figures and subsequent reaction on emerging markets.

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