- We are confident that the Polish central bank (NBP) will no longer hold back from monetary easing and we expect it to start the easing cycle with a 25bp rate cut today, which is the consensus view too. The market has also fully priced this in, so we do not expect much movement in the zloty or rates if they cut today. The obvious reason why the NBP should ease monetary policy sooner rather than later is the fairly sharp weakening of the Polish economy, as the escalation of the European crisis and the continued global economic slowdown has begun to weigh on Polish growth. Besides the growth concerns, the current global environment, where the Federal Reserve and ECB are moving towards more easing (as are, for example, the Hungarian central bank and Czech central bank in the CEE region), which supports risky assets including the Polish zloty and tightening monetary conditions in emerging markets economies, argues in favour of a rate cut. The absence of Zyta Gilowska, who is considered to be a hawk within the Monetary Policy Council (RPP), suggests that the rate cut could secure a majority. Furthermore, NBP governor, Marek Belka, recently said last week that the NBP will discuss policy loosening. It should be mentioned though that Polish inflation is still above NBP's target of 2.5%, so a cut is not an absolute certainty.
- AUD and NZD remains under pressure today after Australian trade balance data showed the widest trade deficit since 2008 and Chinese non-manufacturing PMI data dropped in September adding to the concerns that exports demand from China could continue to decline. Carry trades have in general not performed since the Fed announced its third round of QE and despite low levels of volatility in the FX market as Chinese growth concerns continue to weigh on risk sentiment.
- However, more than three full 25bps rate cuts over the next twelve months are still priced in in Australia and our view is in general that Chinese growth concerns are slightly over-priced. However, we prefer to stay cautious until we see more clear signs that the Chinese economy has bottomed out.