On Friday, CEE market sentiment was positive mainly owing to progressing talks between Russia and the US on a diplomatic solution of the Syrian civil war. The zloty, the forint as well as the koruna strengthened, although gains of the Czech currency were limited due to existing threat of FX interventions against the koruna before the next week´s CNB Board meeting.
The zloty recorded largest gains among regional currencies, in spite of a statement by the Polish deputy finance minister Wojciech Kowalczyk, who said that the Finance Ministry was taking into consideration the possibility of banning pension funds from buying foreign bonds. Although private pension funds currently do not put money into sovereign foreign debt, recent measures draining pension funds of money invested in domestic government bonds made exploring foreign bonds markets more attractive.
The regional calendar is empty this week and thus the focus will be on global markets – first of all on the upcoming Fed decision concerning reduction of its monetary stimuli. The FOMC meeting willconclude on Wednesday with the usual statement, the publication of the economic and rate projections and a press conference by chairman Bernanke. All three have the potential to affect emerging and tha is why CE markets too. The decision about the start of the tapering of the bond purchases is the key issue of this meeting. We still believe that the tapering will start, but slowly via a reduction of the monthly amount of purchases by $15B to $70B. Consensus is for a $10B reduction. Second item is the forward guidance.
Will the Fed combine tapering with tweaking the forward guidance in a dovish sense, by reducing the unemployment rate threshold to 6% (from 6.5%) and/or by installing an inflation bottom? We don’t expect the former to happen at this meeting (and maybe never), as a 6% unemployment rate threshold would be close to the 5.6% the Fed considers currently as full employment.