EMEA Daily Update

Czech Republic (=)

The behaviour of the koruna exchange rate and its frequent visits to near the CB's FX floor suggests that the market may be "testing" the EURCZK 27.00 floor. Despite key CB board members often reiterating support for the FX targeting framework, and signalling possible extension of the measure in time or in magnitude, the market appears only to partially buy into how committed CNB is – this is possibly because of Pres Zeman's open criticism of the policy and his announcement that he will appoint his ally Jiri Rusnok to the CNB Governor position in mid-2016, which will basically end FX targeting.
Does the market sense that the CNB board is hesitant to put their full weight behind "further increasing" the scope of this policy at this time? Our own view is that CNB will not be able to maintain a "soft status quo" with verbal rhetoric for much longer; the outcome is likely to be quite bi-polar: 1) Either CNB will cut rates to negative or shift the EUR-CZK floor up towards 29.00, which will then settle this issue for the time being, or 2) CNB will do nothing, saying that the current floor is adequate and has done its job to boost inflation, which will have obvious meaning, and then the risk will be that CNB will struggle to maintain even this floor. Time for decisive action.

Russia (=)

First indicators of a drop in activity from industrial output, which fell by 1.6%YoY in February, mainly on manufacturing goods. Food products are benefiting from the substitution of banned food imports, but heavy goods are suffering, as also seen in GAZ Group automobile maker's forecasts of an almost 47%YoY drop in production. This is the sort of industry in which employment will be hit, leading to dissatisfaction on a more global scale, as a latest Levada opinion poll shows, with inflation being the top worry (82%), followed by poverty and unemployment. RUB-neutral, given it is still in a recovery phase from its overshooting.

Ukraine (-)

Separatist forces are rejecting the ammendments that the Ukrainian parliament has passed to provide limited autonomy to the areas they currently hold in Donetsk and Luhansk. According to the ammendments, local elections need to be held first. In addition, parliament has officially approved a request for UN peacekeeping forces in eastern Ukraine. We do believe Russia could eventually agree to such a move, which is absolutely necessary to prevent any more hostilities.

Poland (=)

FinMin Szczurek remarked in the media that he would like to have pending amendments to the NBP Act fully passed before the autumn elections: among the amendments the govt targets 1) cutting the MPC size down from 9 to 6 (NBP opposes this), and 2) also adds govt bond purchases and other broader measures to the monetary policy toolbox. Revision of NBP's inflation target is not on the agenda, however.
Wage growth slowed down slightly in Feb to 3.2% y/y from 3.6% in Jan, partly on base effect and partly on mining and transport sectors aberrations. Underlying trend stable at a healthy c.3.5%, with no pass-through to inflation, which is a major positive.

Hungary (+)

AKK announced modest HUF 74.2bn plan for domestic (net) issuance for Q2, down from HUF 194bn in the preceding 3 months. Gross issuance would be about the same, but there is much more planned expiry of 3-month T-Bills. Bottomline: The fiscal deficit is under control and so are borrowing requirements, which makes this a supportive environment for local bonds especially as ECB liquidity meets limited supply.

Turkey (=)

In line with our expectations, CBT left all policy rates unchanged at yesterday's meeting, while continuing to sell c.$40mn in FX per day in an attempt to stabilise the lira; the decision not to cut rates aims to demonstrate, in our view, that CBT can still make independent decisions.
CBT highlighted upward inflation pressure from food and administered prices as well as from the weaker lira, and reiterated the need to maintain cautious monetary policy. Nevertheless, its underlying stance is becoming more dovish as the oil price is fully supportive once again, and the current-account deficit has been narrowing rapidly (which means less external financing requirement, going forward). We expect rates to be 100bps lower by end-Q3, even against a backdrop of Fed hike.
If backed up noticeable downward momentum in core-inflation, such a cut will not unduly pressure the lira: we see USDTRY in the 2.65 range by year-end, only marginally higher than at present, although there could be bouts of overshooting and volatility during and after the elections.

Israel (=)

Incumbent PM Netanyahu’s Likud party won a surprisingly dominant victory yesterday, capturing 30 knesset seats (of 120), with centre-left Zionist Union capturing 24. Late night exit polls had suggested a more even balance between the two parties. Likud won based on Netanyahu’s last minute lurch to the hard right, focusing on security and abandoning ideas of negotiating with Palestine. This will now somewhat complicate the regional picture, and also make it more difficult for the ruling party to attract cross-party support for key policies. But, specifics will become clearer as the structure of the ruling coalition is officially announced in coming days.

Serbia (+)

The head of the EU delegation has stated that Serbia is showing very strong commitment to the EU process, with the possibility of the first negotiation chapter being opened this year, although Germany wants to see full normalisation of relations between Serbia and Kosovo first. In any case, good news, as it helps secure more EU funding too, with EUR 1.5bn already set aside for 2014-2020.