Along with other CE currencies the Polish zloty lost ground in a technical move on Wednesday morning, but managed to recoup all the losses later in the day supported by capital flowing back into the bond market. Two hours after the opening the EUR/PLN pair hit it’s daily high just below 3.82 where steam ran out and the correction ended. Early in the morning the market was also hit by press speculation that the 2006 PLN 30.5 bn. budget deficit might be in danger due to overly optimistic revenue estimates. Pessimists predict a shortfall of up to PLN 7.5 bn. We treat such estimates cautiously since it seems far too early to judge such a whether such a risk actually exists.
At the same time we are also fairly confident that the budget will do reasonably well this year. It’s worth stressing, that the macroeconomic assumptions in the 2006 budget including GDP growth, labor market, interest rate and FX forecasts are fairly conservative, which should give the MinFin some breathing space this year. Moreover, last years budget revenue which was also said to be overestimated eventually topped expectations, potentially thanks to structural changes going on in the Polish economy. Hence we do not see significant downside risk concerning this years deficit. After hitting its daily low the zloty returned to range trade above the 3.80 EUR/PLN area. Just before the end of trade the EUR/PLN pair managed to break back past the 3.80 threshold benefiting from renewed interest in Polish bonds and despite the gently negative news on Hungary’s rating at Moody’s ended the day in the 3.79-3.80 range.
Barring any technical profit taking the zloty should stick to the recent 3.75-3.80 EUR/PLN range in coming days. The retail sales and unemployment numbers will be the highlight of the morning, although our expectations (6.5% y/y and 18.1% respectively) are more less in-line with the market expectations hence the impact of the publication on the zloty should be marginal.
(CSOB - Investment research)