Poland: Zloty hit by trade disputes and higher inflation

Calm week ahead in Poland, with no macro releases scheduled. Global markets to take time to digest last week's FOMC decision and new duties on Chinese imports to US. Hence, we expect yields to remain around recent levels and zloty to remain on weaker side of 4.30 vs. EUR.

This week:

No releases scheduled

Last week's highlights

• Flash inflation for July surprised to upside and arrived at 2.9% y/y (0.0% m/m), driven by robust food prices growth.

• Governor Glapinski not concerned by increase in inflation and sees no need for monetary policy to react to it.

• MPC members Gatnar and Hardt do not rule out possibility of rate hike at end of year.

Bond market drivers

• Polish 10Y yield followed core market

Ahead of the FOMC meeting last week, the Polish 10Y yield went up by 15bp to 2.25%. As an aftermath to the rate cut decision, the 10Y yield on Polish papers went back to 2.1%. However, there was barely any reaction to the surprisingly high inflation reading for July, which came in at 2.9% y/y. The spread vs. the 10Y Bund widened over the week to 270bp, but this trend reversed following an increase in trade tensions and the FOMC decision, and the spread narrowed until the end of the week to 360bp. There are no local or global macro releases this week. Hence, markets should digest the FOMC decision and new duties on Chinese imports to the US. We expect the Polish 10Y yield to remain around recent levels.

• Weekly performance of 5Y bonds (% in EUR)

Bund movements continued to be a force majeure for CEE bond markets last week. We do not expect this to change going forward, so developments around global trade disputes and the general uncertainty in global growth prospects could, through their impact on Bunds, continue to heavily affect CEE yields. The strongest decrease in yields was observed in the Czech Republic last week, but this was also due to the CNB's new economic forecast (released after the decision to keep rates unchanged) envisaged possible rate easing next year as the baseline path.

FX market drivers

• Zloty hit by trade disputes and higher inflation

Over the course of the week, the zloty weakened by 0.8% against the EUR. The EURPLN went up to close to a five-month low above 4.31. Apart from global factors, such as the disappointing FOMC decision and renewed trade dispute between US and China, local factors also put additional pressure on the zloty. The higher than expected inflation reading for July and Governor Glapinski's comments regarding expected stability of rates until 2022 were negative for the zloty. We see the zloty as somewhat appreciating until the end of 3Q19, but the recent intensification in trade tensions could pose a risk to our forecast.

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