CEE currencies were stronger ahead of EU summit on mounting expectations that European leaders are going to deliver final solution to ongoing euro-crisis. The zloty trimmed recent warning of Moody’s that it may cut the outlook on Poland’s A2 rating to negative, if government hesitance over budget plan causes spike in funding costs. Although the Polish government has some breathing space, we are also afraid that Donald Tusks gradual approach to the reforms may not be sufficient. We expect the budget deficit to be slightly under 6% of GDP this year, which is only 2 percentage points down from previous year. Given Polish GDP growth at nearly 4%, the current government reforms clearly looks non-ambitious. Although according to domestic methodology the government debt is set to stay below the legislative threshold (55% GDP), according to both IMF and ESA international methodology the debt levels should exceed it.
On the other hand we agree with central bank governor Belka, that there is not much reason to be afraid of further zloty’s weakening (from current levels), which would be driven by domestic fundamentals. Now the fear is purely about eurozone crisis. If there is a credible solution to it, all CEE currencies can strengthen significantly. Nevertheless we are somewhat afraid the solution may not be delivered as soon as markets tend to believe now. Under that scenario the zloty could rely on BGK and NBP interventions, but the koruna and the forint may feel more pressure in the days ahead. The Czech currency is probably set to test 200-week average near 25.30 EUR/CZK.