East Europe Update: Zloty Extends Gain, Rouble Rallies

The rally in oil prices has given the Russian rouble a spur and reports suggest that the central bank intervened, estimates suggest $500- $700 mln worth of roubles were sold. The rouble traded at its best level for the year against the dollar. While much of the intervention is thought to have been conducted against the dollar, there is talk that some of the dollars have been or will be sold for euros. Separately, Russia reported Sept inflation eased to 10.7%, the lowest in two years, from 11.6% in August. This is supporting speculation that Russia will cut rates again this month and maybe another time before year end. The Economic Ministry expects inflation to range between 11.6%-12% this year after 13.3% last year. The risk is that inflation undershoots. The rouble appreciated almost 6% against the US dollar in Sept, its first monthly gain since May.

The Polish zloty extended its gains for the third consecutive session, the longest advancing streak in several weeks. The zloty under-performed in the second half of Sept, but the resolution of a corporate action, more speculation that Poland can be among the first in the region to raise interest rates after having averted a recession, and building interest in the coming equity offerings in Poland (PKO largest Polish bank by assets and an IPO by PGE, the largest Polish power supplier).

Last Friday we identified a low risk opportunity to buy Poland. While we liked it against the euro, we also suggested going long Poland vs Czech. The euro is testing the PLN4.17 level, which is a retracement target. Some very near-term consolidation would not be surprising with a move back to PLN4.21 area providing a new entry level. Look for PLN4.10 and maybe even PLN4.05 by year-end.

We had recommended long PLN short CZK position below CZK6.0. The first target is near CZK6.14, which is being approached, but we have our sights on the CZK6.18-CZK6.20 area. Over the slightly longer-term, we look for the zloty to retest the Aug high near CZK6.34.

Given risk that Latvia does not reduce its budget deficit as much as Sweden wants, one might want to consider looking at a zloty position against Sweden. PLN is currently just below SEK2.45. A break of the trend line, drawn off the July and early Sept high, which comes in near SEK2.47 would suggest the potential for as much as a 5% move back to the July high near SEK2.60.