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New Europe Weekly

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Carry protection disappearing in EMEA

Fri, Oct 23 2009, 13:45 GMT
by Lars Christensen

Danske Bank A/S

Baltic worries unlikely to disappear

Recently worries over the situation in Latvia have resurfaced and they seem to be on the minds of investors as a possible “game spoiler” for the CEE markets. Yesterday Latvian Finance Minister Einars Repse suspended the head of the country's tax office as part of a long-running dispute. This might lead to speculations about the stability of the ruling coalition. Next week the Latvian government is supposed to present its 2010 budget to the Latvian parliament. However It is still uncertain whether this will happen, which means it will attract a lot of market attention. If the government fails to present the budget with the budget cuts agreed with the IMF and EU, it will be very negative for the Latvian markets – and a significant spill-over to the other Baltic markets is very likely.

Key events next week

On Tuesday we will receive Q3 GDP data in Lithuania. Unfortunately there are very few signs of stabilisation in the Lithuanian economy and we expect GDP to have dropped by as much as 25% y/y in Q3 – down further from a drop of 20.2% y/y in Q2.

The Polish central bank (NBP) will announce its rate decision on Wednesday and while there seems to be little doubt that the NBP once again will keep its key policy rate unchanged at 3.50% there will be some focus on whether the NBP will decide to change its “easing bias” to a “neutral bias” on the back of signs that the Polish economy continues to recover. We think the NBP will keep the “easing bias” for a few more months.

Fixed income outlook

Market rates kept tending lower during this week on ample liquidity and limited inflationary pressures. This is particularly the case in Hungary and Russia, but also quite noticeable in Czech and Turkish market rates. Meanwhile South African rates went higher.

The EMEA fixed income markets are likely to take their cue from especially the publishing of the Turkish central bank’s quarterly inflation report (Tuesday), the Polish central bank’s rate decision (Wednesday) and possible new worries about the situation in the Baltic States.

FX outlook

There is not much change in our EMEA FX Scorecard compared to last week, but it has become increasingly clear that Carry Score has turned negative for all currencies covered in the Scorecard with the exception of the Polish zloty. Overall, there is basically no more room for rates to go lower in the region without triggering a negative correction in the EMEA FX markets.

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Published on  Fri, Oct 23 2009, 14:07 GMT