CEE: Rates matter again

This week, we will see a number of hard data from the Polish economy. Industrial production, PPI and wage numbers will be released today. Our economists expect another 0.5% year-on-year decline in industrial production – better than market expectations. However, the slowdown in China and the weak performance of German industry shows the risk of another weak result for Polish industry. On the other hand, wage growth should confirm steady double-digit growth. Tomorrow, Poland will remain the main focus with the release of retail sales and construction data. Thursday will see consumer confidence data in the Czech Republic, which could show further improvement thanks to a rapid slowdown in inflation. 

On the sovereign rating side, Fitch will publish a review of the Czech Republic on Friday. The agency downgraded the outlook to negative from AA- stable in May last year, mainly due to the deteriorating fiscal policy trajectory. However, the negative scenario has not materialised since then, and the government has unveiled a large consolidation package resulting in a rough halving of the public deficit next year. We therefore expect the outlook to return to stable.  

In the FX market, CEE currencies have gained some ground in the past week after some time despite the fact that US dollar levels are not making the region's life easier. In our view, the gains were mainly driven by rising market interest rates and support from the interest rate differential. Moreover, after weeks of weakness, more balanced positioning across the region is also helpful. Interest rates drivers seem to be back after a long time, and Friday's move indicates further gains for today. The Polish zloty seems most tempting from this perspective, almost touching 4.50 EUR/PLN last week, which we believe is the upper ceiling of the current 4.40-4.50 range. Unless today's data surprises on the negative side, we could see further gains below 4.44 EUR/PLN. The Czech koruna should finally settle below 24.00 EUR/CZK.