News
CZ: Neutral – Govt auctions CZK 7.3bn 6Y CZGB (p2)
RO: Positive – July inflation falls to 4.85% (p2)
Today’s Events
CZ: June C/A; ES: 2Q GDP (Preliminary), June C/A; HU: July CPI; LV: June C/A; PL: June C/A; SRB: Policy rate announcement, RSD 4bn 3M tbill auction; RU: 2Q GDP (Preliminary); TK: June C/A
EEMEA Markets
PLN played catch up with RUB and TRY on Wednesday in terms of losses against a hugely volatile global backdrop. That said the sort of currency volatility that we have seen in recent days is unwelcomed by all central banks in the region. A key question at this stage is what they are willing to do about it. The short answer, at least for now, is little given that price action is driven by global woes rather than CEE-specific vulnerabilities. That said, it is important to differentiate across countries both in terms of the amount of ammunition available to them and their willingness to use it. We doubt that any central bank is willing to step in in sufficient size to reverse a trend at this stage but the CBR in Russia, as well as the NBR in Romania, is likely to smooth any further weakness. Wednesday was much calmer for RUB than Mon-Tuesday but in Romania losses accelerated. The NBR’s reaction, should we breech 4.3/EUR, will be an important test of their comfort threshold. In Russia while FX reserves have yet to recover to their pre-crisis peak, a significant decline in short term external debt means that FX reserves now stand at 7.7 times short term debt compared with 5.4 times in Jun-08. Wednesday saw the CBT auction USD60mn, in line with Monday but down from Tuesday’s USD70mn. Since last Friday the CBT has now auctioned USD240mn, compared with FX purchases of USD14.2bn over the past year. The Serbian central bank has in the past proved willing to smooth both RSD losses and gains, a policy which we expect it to continue to employ going forward. Thursday’s rate decision will prove its confidence in the Serbian economy’s ability to withstand the current global turmoil. Overt action from the authorities is less likely by Poland and Hungary at this stage and least likely in Czech. In Poland the PM acknowledged on Wednesday that there was little that the authorities could do to manage PLN/CHF, a view that the NBH in Hungary also shares. Suggestions of FX intervention earlier this year were not followed up with action in Poland, leaving markets more certain that at least for now long EUR positions will be face opposition from the government or central bank. In terms of a key level for the authorities, 4.25-4.30/EUR will prove more problematic in terms of meeting the 55% public debt to GDP threshold. There is little doubt but that continued CHF strength is damaging to both the banking sector and economic activity in Hungary. To the extent that any force the NBH has a chance of exerting in on EUR/HUF rather than CHF/HUF however, and EUR/HUF though too volatile is far from their discomfort threshold, we expect little over near term action. As has been the case historically in Czech, verbal intervention is only likely to materialise after much more significant losses.
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Gillian Edgeworth
UniCredit Research