News
HU: Positive – August gross wages rise 6.5% yoy (p2)
LT: Positive – Govt presents 2012 draft budget to parliament and announces details of three-year financial plan (p2)
LV: Mixed – Previous parliamentary speaker re-elected, President initiates further coalition talks (p2)
PL: Negative – Labor market data confirm economic slowdown (p3)
TK: Mixed – CBT steps up efforts to battle against TRY losses (p1)
Today’s Events
CZ: CZK 8bn floating 2013 GB auction / KZ: KZT 10bn fixed-rate 2025 and KZT 15bn 2027 GB auctions / PL: PLN 3bn 2016 GB auction, September IP, September PPI / RU: Labour market statistics, Weekly CPI, September Production capacity investments
EEMEA Markets
* Global backdrop: yesterdays downgrade of Spain by Moodys did not have a long lasting negative impact as Asian equities closed slightly up whilst EUR/USD is also up by 0.4% in the morning. Credit markets are opening tighter across the board this morning both on EMU periphery and in CEEMEA. Focus will be on US CPI numbers and housing starts today. In CEEMEA the main event of the day will be the new Polish 5y benchmark issuance (10/16) with up to PLN3bn on offer. We expect yields around 5.15%.
* Turkey -Tuesday saw the CBT step up its battle against TRY losses. The Bank sold USD 750mn on Tuesday morning at its auction, having offered USD 1.35bn. This was followed up by an ad hoc intervention during the afternoon. If we pencil in USD 500mn in intervention yesterday afternoon, the CBT has now sold USD 6.5bn since early August. Cumulative FX reserve accumulation since end-09 by the CBT still stands at a positive USD 15.2bn, i.e. the bank is running down ammunition quickly but it still has some left. At this stage the CBT is clearly concerned and keen to cap any further TRY losses. Over the same period data available shows foreigners sold USD 4.8bn in bonds while in August local banks paid down USD 1.1bn in short term external debt. From this perspective, we could argue that the CBT soaked up short term inflows on the way in and is now allowing these back out again. Latest weekly data show no significant shift in deposit trends amongst locals towards FX. Looking ahead, the focus will remain on FX auctions but also on Thursday’s rate decision. The CBT signalled that it will deliver another large amount of FX today if necessary, while at this stage we do not believe in a rate hike on Thursday, in particular given the CBT’s views on weak economic activity. Last week’s industrial production data will have further added to its conviction on this front. We do not rule out that the CBT will allow banks to cover more of the TRY reserve requirements with FX but perhaps most effective in stabilizing TRY would be a reduction in its provision of TRY liquidity.
* Against the above backdrop we recommend paying 1y1y TRY at 6.50% target 7.25%. Following the aggressive CBT intervention in the FX market yesterday we see risk reward in favor of paying 1y1y TRY fwds. We set target at 7.25% and stop loss at 6.10%. The key rationales of this trade are the followings: 1) We beleive the current low level of risk preium priced into the short end of the curve (1y1y minus 1y rate is currently only at 20bp) is inconsistent with a central bank which is becoming increasingly agressive in defending the TRY. 1y1y fwds are still about 150bp lower than in July when the CBT stepped up intervention efforts and cut rates. Since than the CBT lost about 6% of its reserves. In line with the low level of risk premium the roll down on our trade is a modest negative 1.5bp per month. 2) With the FX interventions the CBT is effectively reducing the TRY money base which should push up rates. Moreover in case the intervention does not work we beleive the CBT could also limit the available TRY at its daily repo auction (something which we closely monitor in the coming days). This in turn could push money market rates significantly higher. O/N rates are currently hovering around 6.25% whilst the TRY O/N fwd rates are around 6.15% (vs circa 7% in June/July).
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Gillian Edgeworth / Gyula Toth
UniCredit Research