Searching For Opportunities In Rates Markets
The recent compression in Polish forward rate agreements (FRAs) is directly in line with our recent adjustments to our policy rate forecasts. We now expect rates to remain on hold across 2014 as inflationary pressure remains largely absent, with the first hike forecast to arrive in Q115 (see 'Shifting First Rate Hike To 2015', 7 May 2014). CPI data released on May 14 saw inflation drop to 0.3% y-o-y, from 0.7% previously, pushing the 9x12 FRA down from to 2.66% on May 14, from 2.80% on May 9, effectively pricing out a rate hike through to February 2015.
As we see limited opportunities in Polish equity markets over the coming quarters (see 'Not Much Value In Emerging European Stocks', 30 March 2014), rates markets will likely present more interesting opportunities to play Poland's macro story. For instance, while rate markets currently align with our interest rate forecasts, our expectation for 50 basis points of hikes in Q115 implies the 9x12 FRA may offer some value if it holds around current levels by the end of June.
However, ECB policy remains a major unknown at this stage. Recently released GDP data indicates growth momentum in some peripheral eurozone economies is already stalling, which combined with disinflationary trends across the region will increase pressure on the ECB to act to weaken the strong euro, which it believes is at least partially culpable for weak inflation. We expect the ECB's course of actions will probably underwhelm, in which case we would see limited risks to our Polish rate forecasts. However, if the ECB's action is surprisingly decisive, this could have major ramifications for the regional rates outlook. While we believe Poland's rate cutting cycle has finished, a significant appreciation of the zloty against the euro past PLN4.00/EUR could potentially lead the National Bank of Poland to turn more dovish, therefore for now we prefer to wait for clarity over the ECB's decision in June.
|No Hikes Until Q115|
|Poland - Interbank Rate & Forward Rate Agreements, %|