On Monday, Central European currencies more or less erased previous gains and posted small losses. The market paid only little attention to local macro data (Poland’s industrial output for October surprised on the downside and PPI on the upside) and focused mainly on ongoing euro zone crisis. The EUR/PLN currency pair edged to 4.47 EUR/PLN and underperformed its regional peers. The MPC member Andrzej Kazmierczak expressed his worries over the zloty as he said it may translate into higher inflation. Kazmierczak added that if inflation persisted above 4% Y/Y level the NBP should consider policy tightening. Nevertheless, we believe that this will not be the case and we expect interest rates in Poland to remain stable next year (markets bet on a rate cut in 9 months).
Rising risk aversion has been apparent across all asset classes in recent weeks. Regional stock indices lost on average 1.9 % and 10Y bond yields soared by about 20 bps yesterday. In case of the Czech 10Y yield it leapt by nearly 20 basis points (3.75%/2020) – arguably due to low liquidity. Hence, the yields reached almost 4% (see the chart) and returned to levels last seen in the end of April this year. At the same time, the CZK IRS curve remains more or less stable – so, the asset-swap spread reaches the highest level since July 2009.
Regarding the outlook, we believe that regional currencies should remain under pressure. Rising spreads between German and the-rest-of-EMU yields should weigh on CE currencies in sessions ahead.