Markets

Leu misses firming on CPI jump, Warsaw stocks test multi-year high

Published October 11, 2017 Updated October 11, 2017 10:28pm

The region's most liquid currencies, the zloty and the forint, firmed 0.3 percent against the euro, extending this week's gains fuelled by money flowing out of the weakening dollar.

Warsaw shares rose one percent. The index hit a 5-week high, a touch from its highest since mid-2015.

The stocks are buoyed by technical factors and expectations for strong economic growth in the rest of the year, 4.4 percent in annual terms according to a recent Reuters poll. Plans for a power market law would help finance the construction of power stations and boost energy stocks, traders said.

If expectations for Federal Reserve interest rate hikes push the dollar into an uptrend later this year, that "may worsen the investment climate on the Polish stock market and other emerging markets," BZ WBK brokerage trader Pawel Kubiak said.

The leu, after a rise earlier this month amid a liquidity squeeze in Romanian markets, has missed the rise elsewhere in the region, just like Romanian stocks and government bonds.

Prime Minister Mihai Tudose announced on Monday that he was considering a cabinet reshuffle due to corruption allegations against three ministers, a move that could sow tension within the ruling Social Democrat party.

September figures released early on Wednesday showed a continuing rise in Romanian annual inflation to a higher-than expected 1.8 percent from 1.2 percent in August.

"No place to hide from a (central bank interest rate) hike," Bucharest-based Erste Group economist Horia Braun-Erdei said in a note. "We pencil in two policy rate hikes at the beginning of 2018, on top of the likely narrowing of the interest rate corridor in November."

An expected rise in government spending later this year could help ease the liquidity squeeze, for which the government has criticized the NBR, but could increase worries about a rise in inflation pressure and the budget deficit.

"A tightening of the fiscal stance would be desirable, as it would reduce the need for rate hikes that may prove costly...," Braun-Erdei said.

The bank, fearing speculative capital flows, has said signals from the European Central Bank and the Polish central bank (NBP) could influence local decisions.

While the ECB hesitates, the NBP is unlikely to lift rates any time soon, though a surge in forward rate agreements this month priced in a start of rate hikes within 12 months. Most analysts have projected a later rise.

Copyright Reuters, 2017