News
CZ: Positive – June C/A posts a CZK 9.3bn deficit, 86% financed with FDI (p2)
HU: Positive – July CPI slows down to 3.1% yoy (-0.3% mom) (p2)
PL: Negative – June C/A deficit comes in higher than market expectations at EUR 1,596mn (p2)
Today’s Events
BP: 2Q CDP, July CPI/CR: June Retail trade/ES: 2Q Unemployment/PL: July CPI, July Money supply/RU: July Budget lvl, Money supply as of Aug, 8/SK: July CPI, June IndOrders/UA: June Trade balance
EEMEA Markets
Who is best placed to defend their currency, the Polish or the Turkish central bank? Since the start of the year PLN has posted double digit out-performance relative to TRY, though compared with expectations for PLN at the start of the hiking cycle in January of this year, PLN’s performance has also been far from stellar. There are some similarities worth noting. Both economies were quick to recover following the crisis but this trend was also accompanied by a widening of current account deficits, financed in both cases by short term inflows. In Poland’s case this has been primarily fixed income portfolio inflows. In Turkey’s case it is made up of fixed income portfolio inflows and short term foreign bank borrowing. The primary difference has been monetary policy. Poland employed a traditional monetary policy, hiking rates while doing little to oppose short term inflows. Turkey employed an unorthodox monetary policy, dividing its focus between inflation and monetary policy.
At this stage both sets of authorities have signalled dissatisfaction with the increased pace of currency losses. However as has been the case in the past, Turkey has been more aggressive in terms of taking measures to achieve its objective. While its rate cut clearly does not favour TRY, it has shifted from FX purchases to FX sales while also cutting FX reserve requirements to release more hard currency into its banking system. Thursday saw the Polish authorities step up their rhetoric against PLN losses, though at times with mixed messages, but the authorities have as of yet to take overt measures to counteract this.
This has also been the case in previous episodes of PLN weakness. Increased rhetoric was probably triggered, at least in part, by concerns that PLN losses will threaten the 55 percent of GDP debt threshold. The MinFin has the option to continue to sell EU fund proceeds on market but that in itself has acted only as a moderate smoothing mechanism. The NBP can potentially accompany with its own interventions, drawing off FX that has been accumulated from EU inflows from previous years or its USD30bn FCL from the IMF. This central bank board is undoubtedly more open to that than the last. That said it is our impression at this stage that we will need to see more extreme PLN losses before this materialises. This suggests that, at least for now, PLN outperformance relative to TRY may have ran its course.
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Gillian Edgeworth
UniCredit Research