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Central European Daily

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Central European Daily: January 25, 2008

Fri, Jan 25 2008, 10:56 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech Koruna set fresh all-time high against the euro

Fixed Income: Hungary’s bonds tracks HUF recovery

Currencies

Polish zloty extended its most recent rebound into the EUR/PLN 3.61 alongside with other currencies in the region as risk appetite conditions continued to improve on Thursday. With equities in the US and Asia heading higher and the dollar back under pressure the sentiment remains favorable for the zloty heading into the weekend. The interest rate channel should now again underpin the PLN’s performance as the hunt for higher returns resumes. Even though very short term rates have fallen dramatically in January, with the tightening cycle not over yet, current levels remain quite favorable across the curve.

 The market seems to have entered calmer waters after an extremely volatile start of the week. The driving force has not changed though - equities should continue to lead the way for the zloty in the hours to come.

 Yesterday, the HUF was helped by the recovery on equity markets. The market got stuck in the 257-258 range and decreasing volatility insisted buyers to return and overnight trading saw it below EUR/HUF 257. The 256-257 range could be today’s new range and this would be enough to draw a new appreciating trend.

 The Czech koruna supported by strong rebound in equity markets and hawkish comments delivered by CNB Board member L. Niedermayer (see more in fixed income section) established fresh all-time high against the euro yesterday. First, the EUR/CZK pair easily broke below the 26.0 level and then marched south. The pair set a new all-time low at the 25.59 level.

 A combination of equities’ recovery and the expected rate hike might support the koruna in upcoming days. Hence, there could be more downward pressure on the EUR/CZK pair, where beside the fresh new low the next support level comes at 25.71.

 The Slovak koruna followed the regional leader and gained on the positive central bank comment. The unit booked more than 0.5 percent profit on the day and closed near the EUR/SKK 33.50 threshold. NBS governor Sramko said on the economic conference that Slovakia will seek to set the conversion rate close to its economic fundamentals. The market took it as a verbal intervention in favor of the local currency. We think that Slovak central bank is in a difficult position. The economy is growing fast and unemployment is at all time low. Thus, it is creating potential upside risk for inflation, even if inflation is still driven mainly by the cost factors. And it seems that the NBS will have to lower rates ahead of the EMU entry to ECB level (now at 4.0% but we think with potential to slid to 3.50%). Therefore, it is desirable to have astronger currency that could curb potential inflation pressures. We still believe that conversion rate could be close to our target of EUR/SKK 32.30 (probably officially announced in June- July 2008). Today, koruna should take a pause. The EUR/SKK 33.500 should be a hard nut to crack on the first attempt.

Fixed income

Polish bonds gave back some of the recent gains on Thursday, particularly for longer maturities, as core markets edged back on strong equity performance. At the same time the (inverted) curve continued to flatten as the short end held up to the pressure thanks to the substantially reduced rate hike expectations in recent weeks. We expect that the long end of the curve may extend yesterday’s correction if core markets continue to slide today. In a longer term perspective consolidation at slightly higher yield levels (5.9-5.95%) and a flat curve seems a likely option as the tightening cycle continues, inflation rises to reach its peak in February and the real economy recovers after the one-off softer results in December.

 The close connection with the currency also lifted Hungarian bonds this time and yields lowered 5-10bps across the curve. The bond market is simply following the currency, which is tracking the global risk appetite and this is helping both now. This morning’s comment from the central bank Governor is a clear reflection how volatile markets became as he has talked about the possibility of a rate hike and a rate cut together. However, his words are softer than Monday’s hawkish statement, which mentioned only the rate hike option. This could be another positive sign for the fixed income market today.

 The Czech yield curve shifted upwards as the Czech bonds tracked the sell off on the German bund driven by the improving sentiment on the equity markets. The losses of the shorter maturities were quite moderate thanks to the strong Czech koruna. The domestic news was more or less ignored. These included mainly Comments by CNB Vice Gov. Luděk Niedermayer that there are serious inflation risks.

 There was also speculation that the Chancellor Jiří Weigl might succeed Niedermayer at the CNB.

 There are no interesting market movers scheduled for today. Hence we believe the sentiment on the European equity market should be crucial.

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Published on  Fri, Jan 25 2008, 11:08 GMT