PLN: Zloty Extends Gains As NBP Comms Highlight Preference For Gradualism
EUR/PLN has shed 71 pips to last trade at 4.2426, breaking out of the 4.25-4.30 range and hitting its worst levels since Apr 10, as the market absorbs the impact of yesterday's relatively cautious NBP presser. Bears look for losses beyond 4.2250/4.2231, the 100-DMA/Apr 9 low. Bulls still target Apr 16/Dec 25 highs of 4.3102/4.3114.
- The message coming from the MPC in the wake of this week's 50bp rate 'adjustment' was one of caution about the anticipated further rate cuts. Henryk Wnorowski said that 'July will be the first moment when we could return to further rate cuts' should the next macroeconomic projection show a 'good inflation path'. Ludwik Kotecki agreed that monetary easing will be discussed in July but 'September may be a better moment for a return to cuts.' Meanwhile, hawkish dissenter Joanna Tyrowicz published a LinkedIn post with a long list of factors which in her view prove that conditions are not ripe for monetary easing.
- POLGB curve has bear flattened this morning. The local debt market largely discounted the NBP's dovish pivot already after the April meeting, showing muted reaction to the widely expected 50bp rate cut this week. The latest upleg in yields likely reflects a reaction to yesterday's press conference, which saw Governor Glapinski tone down expectations of aggressive cuts.
- The WIG Index has added 1.6% this morning, refreshing all-time highs, while the WIG20 Index sits 1.8% higher on the session. The WIGBank Index is 2.4% better off as the banking sector mulls the outlook for interest rates (more cautious easing being a positive factor) but also the central bank's plan to debate tweaks to the parameters of required reserves.
- The NBP will publish the minutes of the April monetary policy meeting at 13:00BST/14:00CEST. The meeting preceded a sharp dovish turn in Governor Glapinski's rhetoric.
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GERMANY: Coalition Agreement Likely Today-Reports
Reports from local media suggesting that confirmation of an agreement on a new governing coalition will be announced later today. The conservative Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU) and the centre-left Social Democrats (SPD) will hold a presser at 1500CET (0900ET, 1400BST) reports Hans von der Burchard at Politico. At present, coalition talks are still underway.
- Bild reports 'leaked' parts of the agreement: "Employees are to be given relief. Among other things, the tax rate is to take effect somewhat later and be somewhat flatter. This will provide relief for every taxpayer, according to sources involved in the negotiations. The SPD's demand for tax increases for high earners and small and medium-sized businesses will not be implemented."
- Die Welt reports that CDU leader and chancellor-in-waiting Friedrich Merz will speak to lawmakers from the CDU/CSU parliamentary group at 1800CET, with CSU leader Markus Soeder convening his group alone shortly beforehand at 1630CET. For the SPD, the executive committee and the parliamentary group executive committee will be informed at 1630CET, before the wider parliamentary group is told of the agreement at 1800CET.
- While the CDU/CSU will be able to approve a coalition agreement among the party grandees, the SPD grassroots membership will be consulted on the deal, lengthening the timeframe of a new coalition coming to power.
- The agreement comes with Merz under significant pressure, particularly from the right of the CDU/CSU, which has warned he is giving away too many concessions to the SPD in pursuit of a swift agreement. Recent opinion polling has shown the far-right Alternative for Germany (AfD) drawing level with the Union parties at the top of polls for the first time.
Chart 1. Federal Election Opinion Polling, % and 3-Poll Moving Average
Source: INSA, Forsa, GMS, Infratest dimap, Verian, FGW, YouGov, Allensbach, Ipsos, MNI. N.b. First data point represents result of 23 Feb federal election.
CHINA: Clarity on China's Approach to FX Stops Well Short of USD Asset Sales
That Reuters report on China's approach to FX comes as USD/CNY saw the highest fix since 2023 this week, within range of record highs of 7.2258 in June that year.
- The comments were made via 'window guidance' to state banks this week (it is not specified when specifically this messaging took place - so could have been transmitted before Trump's upgrading of tariffs to 104%) and add to the view that China are unlikely to pursue broad currency weakness to combat tariffs, and market/financial stability is the policy priority.
- While the report notes the PBOC asked banks to withhold USD purchasing, and step-up checks on USD buying, this is well short of active selling of USD assets, that have been the source of speculation: Goldman Sachs this week wrote that they see selling of USD assets as a potential option to defend the currency, with market instability a trigger. Their latest estimates have USTs accounting for ~40% of official reserves, or $1.1trl.
SWAPS: German ASWs Rally, Stark Difference To U.S.
German ASWs push higher, which is particularly striking given the selloff in U.S. swap spreads. Last +1.6-4.9bp.
- This further cements the idea of a “sell the U.S.” theme being evident during some of the recent instances of market stress, as U.S. policy uncertainty and the potential long-term rerouting of global trade flows impacts demand for USD assets.
- Note that German long end swap spreads continue to lag on rallies, with the burden of a meaningful increase in German supply over the medium-term continuing to be felt.
- ASW spreads remain below multi-week/month highs seen earlier in the week.
