BZ WBK Rates and FX Outlook - May 2015
In May Rates and FX Outlook:
- Recent data releases confirmed, in our view, that economic growth in Poland started accelerating at the beginning of 2015 and that our call last month to upgrade the GDP forecast for 2015 to 3.6% was right. The flash GDP estimate for 1Q15 will be released on May 15th, and we expect it to show an acceleration in growth to 3.4% YoY, driven by strong consumption and investment and renewed strength in exports. Rising uncertainty about the extension of Greece's bailout has started weighing on business sentiment in Europe in recent weeks; however, we expect the Euro zone economy to perform very well this year, helped by the euro's depreciation, ECB QE, oil prices and a softer fiscal policy.
- The Monetary Policy Council (MPC) is unlikely to change its monetary policy anytime soon, since the recent macro data were strong, deflation started bottoming out, and the appreciation of the zloty has stalled since the Council's previous meeting. Questions on the impact of the stronger zloty on the monetary policy outlook dominated the MPC's post-meeting press conference in April, and it cannot be ruled out that the situation will also be similar in May. However, recent comments by MPC members and NBP officials clearly confirmed that the central bank was still far from mulling any actions aimed at limiting the strengthening of the zloty, especially now that the trend has lost momentum.
- After a surge in the last two weeks, Polish bond yields approached our year-end target levels. We do not rule out a short-term rebound, especially if the next data out of the USA prove to be relatively weak, delaying the expected timing of the first rate hike by the Fed, or if the ECB's QE drags German Bund yields lower after the recent sell-off. However, in the medium run, we remain bearish on Polish bonds for a number of reasons: (1) the predicted acceleration in growth and inflation in Poland; (2) the relatively optimistic outlook for the European economy; and (3) the start of rate hikes in the USA (probably in September). Moreover, we see a continuing negative impact of situation in Greece on Polish assets, as talks on the extension of Greece's bailout do not seem to be nearing an agreement, while its government coffers are running low.
- While the ECB's QE has failed to provide support for Polish government bonds (so far), it does seem to have helped the zloty to appreciate, with the EUR/PLN falling temporarily below 4.00, the lowest level since July 2011. We believe there are fundamental arguments for the zloty to appreciate further in the medium term. However, in the short run we see a growing risk of EUR/PLN correction, or at least stabilisation near the 4.00 level. The main reason for investors' caution is probably Greece, as concern about its financial situation is on the rise.