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BZ WBK Rates and FX Outlook - October 2015

Summary:

In October Rates and FX Outlook:

  • We see a strong resemblance between the current economic situation and the pattern of almost exactly a year ago: the PMI index is falling sharply, we have some disappointments in economic data releases (except the labour market, which is doing fine), and we are facing external shocks that fuel uncertainty about the global economic outlook (currently a slowdown in China and the Emerging Markets, and a year ago Russian sanctions following the crisis in Ukraine).
  • We believe that there are good reasons to expect the Polish economy to continue its healthy economic growth of around 3.5%YoY in the coming quarters, just as it did one year ago, despite the headwinds and risk factors. Robust investment growth is likely to continue, alongside high capacity usage, more-generous public spending and an accelerating stream of funds from the new EU financial framework. The outlook for export growth is also optimistic, in our view. The Euro zone, Poland's biggest trading partner, continues a moderate but healthy economic expansion. Consequently, the labour market should continue to boom (with unemployment approaching a record low), resulting in healthy wage growth and private consumption.
  • Flash CPI data showed deflation deepening in September to -0.8%YoY, but we think this was only a temporary pause in the upward trend, which will push inflation above zero in November and towards 2% in 2016E. We still argue that, in those circumstances, there should be no need for Polish monetary policy to ease in 2016E, even though market speculation about possible rate cuts has been growing recently.
  • We think that speculation about interest rate cuts in Poland may continue in the nearest weeks, amid persistent investor concern about an economic slowdown and prolonged deflation, which may push domestic interest rates even lower. The long end of the domestic yield curve may obtain further support from falling yields on core markets, limited debt supply in October and a substantial inflow of money from bond redemptions and coupon payments. However, we think the scope for strengthening is limited, as upcoming domestic macro data releases should be decent and some investors may be willing to cut their exposure just before the general election at the end of October. We still expect yields and IRS to start rising at the end of the year, in a context of an expected Federal Reserve lift-off, decent economic growth and rising inflation.
  • EURPLN volatility dropped substantially in September and we now see a risk of a zloty depreciation vs the euro in the nearest weeks, given the uncertainty ahead of the October election and the Fed meeting. However, we think such a move would be only temporary. The Polish currency should regain strength at the end of this year, supported by the following factors: (1) continuation of healthy economic growth; (2) rising inflation, which will reduce rate cut expectations; and (3) a US interest rate hike before the end of the year.

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Keywords: report, bzwbk

Author: BZ WBK Economic Analysis Department Price: free