The Polish zloty settled back into a tight range between EUR/PLN 3.75-3.78 as liquidity continued to improve on Thursday. Today the calendar is thin in core markets and with the only the (historical) Q3 GDP data on the domestic agenda (more in FI part) we should see the PLN consolidate further with equity markets likely to be the driver for trading.

The Slovak koruna again showed very subdued trading moving between EUR/SKK 30.32 – 30.37. The only interesting news was the rating upgrade by S&P. The agency raised the long-term foreign currency rating to A+ from A on the back of continued improvement of the country’s competitiveness which will also be supported by the euro zone entry. The outlook is stable. Today, the eco calendar is fairly light with only October PPI data for release. These are traditionally no market movers. The koruna should continue to oscillate close to current levels.

The Hungarian forint remained stable for the third consecutive day on Thursday, as the pair was traded within an even narrower range between 260 and 262. Not much to add to the recent situation, the domestic news is mostly supportive as the budget will likely pass in December, while the international background has also become less negative. Option volatility has finally started to decline from 24% (annualized) to 20%, which could attract carry trades back into the forint. The absence of volatility both in regional fx markets and the EUR/USD pair calmed the Czech forex market too. Hence, the koruna developed a sideways trading pattern in a relatively tight range close to the EUR/CZK 25.20 level. Both the US and domestic calendar is empty today, but Polish third quarter GDP is scheduled for release which might have some impact on the zloty and other CEE currencies.

Fixed income

Polish bonds were little changed in the aftermath of the pre- and post-MPC rally which brought yields down by roughly 40 bps across the curve. Today the Q3 GDP data (10:00 CET) will be the eye catcher on the domestic front, but all attention is likely to shift already to Monday’s FinMin CPI estimate. Growth is expected to have moderated further, but all-in-all remained relatively robust as domestic demand held up reasonably well due to consumption growth underpinned by the strong labor market conditions. We are looking for a slightly below-par 4.7% Y/Y reading (consensus: 4.8% Y/Y) and the risks are skewed to the downside. Given the aggressive price action in recent days the market might already be discounting part of this risk. Nevertheless we could see yields head lower again if growth comes in visibly below our estimate. Regarding growth further out in time, tighter credit conditions will adversely impact both investments and consumption. Along with the weaker zloty, this should start to curb demand for imports. At the same time, the fallout in EU demand will weigh heavily on exports. We are looking for growth to drop below 4.0% in Q4 and to head to 2.0-3.0% in 2009. Domestic demand is likely to remain the driver for growth and the risk is that investment growth will drop into negative territory already in Q1. Czech bonds weakened and the curve slightly flattened during yesterday’s trading session.

Weak volumes triggered higher volatility, but overall the Czech market was once again tracking the Euro zone. Beside that, there was a very successful T-bill auction on Wednesday, which confirms that there is still liquidity in the Czech banking sector. Today, there are no significant domestic data. Nevertheless sentiment can stay rather positive as S&P confirmed Czech rating and left stable outlook. Hungarian bonds rallied sharply as lack of supply did not allow domestic demand to be matched. Foreign investors have stopped selling and this seems to be just enough to make market sensitive to new demand and local institutional investors have been buying small amounts. This means that yields above 11% are hard to find, while the long-end has converged significantly to the IRS curve.

KBC