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Erste Group: CEE Macro/Fixed Income Daily

October 06, 2011 | Erste Group: CEE Macro/Fixed Income Daily

Analysts’ views:

TR Monetary policy: The CBT cut the reserve requirement rates (RRR) for FX liabilities between 50-250bps across different maturities while it opened daily FX selling auction with a maximum amount of USD 1.35bn yesterday. As CBT Governor had already stated that they might take some action without waiting for MPC, if the pressure on currency persists. USDTRY rate peaked at 1.9096 the day before the meeting, but later stabilised at 1.870. The demand in the auction was high at USD 1.83bn but CBT sold USD 750bn. As a subsequent move, Central Bank increased the maximum amount of TRY reserve requirements that can be kept in FX from 10% to 20%. This is a counter measure that will increase the CBT reserves by some USD 3.6bn if banks use all the facility. Anyway, the persisting pressure on TRY reduce the probability of the rate cut (which had been outlined by the central bank) in coming quarters even in case of sharper deceleration of economic growth.

PL Rates: Polish CB left the interest rates unchanged yesterday (4.50%) - a no surprise given the fact that the outlook got bleaker over last two months (preventing further hikes) and given the excessive weakness of zloty (preventing a cut). What came as a bit of a surprise for the markets was the retention of slight tightening bias in governor Belka's comments at the press conference. Belka also reiterated the conviction (which we are also of) that PLN is detached from the fundamentals. While some weakening of PLN might have been justified in the wake of the escalation of the debt crisis, anywhere above 4.10 is a sheer panic. It is our view that PLN will revert back to 4.10 as soon as the current market turmoil eases up - given the slowdown of Polish growth to 3% next year, rates are likely to be held on hold throughout 2012. PLN strenghtened to 4.38 after the MPC press conference.

HU Rates: The minutes published yesterday from the latest rate-setting meeting revealed that Deputy Governor Julia Kiraly voted for a 25bp increase of the 6% rate, while the other six members voted to keep the policy rate unchanged. The Deputy Governor wanted to make an indicative increase of the rate, both due to the inflation outlook and for financial stability reasons, but the others indicated that, at this point, it would be unnecessary to increase the base rate. The meeting was held on September 20; since then, risk assessment has continued to deteriorate and the forint has plummeted further against the euro. The weakness of the forint can both be attributed to external and internal reasons, in our view. There are risks that further strong depreciation of the currency and an increase of risk spreads could trigger a rate hike, but this is not currently our baseline scenario. We forecast a 6% base rate and 290 EUR/HUF at the end of this year.

RS Rates: On rate setting meeting today we see NBS maintaining dovish stance expecting at least 25bp cut, while not excluding more aggressive 50bp move. With ongoing inflation moderation in August (10.5% y/y) and exchange rate holding steady despite turbulent global environment (precautionary arrangement with IMF and successful Eurobond issuance were also supportive factors) we see NBS remaining comfortable to ease further. With inflation outlook looking manageable at present (supported by subdued domestic demand and more favorable cost side outlook), if exchange rate would not come under sever depreciation pressure (moving outside 100- 105 band) we continue to see NBS cutting further in 4Q where our expectation for the YE11 stands at 10.50%.

Traders’ comments:

CEE CDS, Bonds & FX: Yesterday, SovxCEE outperformed following a run up in US and European Financials and key US indices which bounced from new lows. In CEE cash Eurobonds, slow activity is continuing with shorter paper being better bid and some signs of buyers in the longer end reappearing yesterday afternoon. Poland USD 6 3/8 07/15/19 Eurbond moved close to 40 bps down in yield this morning. Cash corporate hardly moved but we bought some TLSGSV 16 and ERST HUF paper and sold some MOL 15. A particular event deserving attention yesterday was OMV’S successful placement of a EUR 500 mn, 10 year 4.25% bond which was significantly oversubscribed according to sources up to 4x. The final spread was ms+185 or b+254, and currently trading at G spread of 236 and ASW of 166. The new placements caused the OMV 2020 bond to re-price which resulted in 3 points fall and trading at the moment at ASW of 156 and G spread of 230. Coming back to Poland USD 6 3/8 07/15/19, following the strength this morning in the bond we can offer 1.5 mn at 110 or ASW of 310 in line with 7 year cds of 310/330.

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