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Czech money market yields set to decline after strong gains of the koruna

Mon, Apr 14 2008, 07:47 GMT
by KBC Market Research Desk

KBC Bank

Headlines

• Currencies: Suspect spike higher in CZK over the weekend.
  
• Fixed Income: Czech money market yields set to decline after strong gains of the koruna

Currencies

The Czech koruna seemed to be quite calm at the end of the week in line with the stable Polish zloty. Nevertheless the show started during the weekend. In the offshore trading a few huge orders and subsequent stop-losses pushed the pair to 23.00 EUR/CZK.

It is hardly believable as the Czech currency is about 18% stronger y/y. Nevertheless we believe that this is an exceptional move that should triggered correction during this week. Hence we expect the pair to return above 25.00 in the upcoming sessions.

The Hungarian forint started to weaken on Friday after rallying 2% during the week as the global background worsened and emerging currencies, like PLN dipped. The March inflation data were a tad better than expected (consensus: 6.8% Y/Y, KBC: 6.9% Y/Y) as lower gas prices counterbalanced higher tradable inflation. The latter however shows that the weak exchange rate has been feeding into higher inflation, which is a new risk to the inflation outlook, albeit it could reverse if the recent appreciation of the HUF prevails. The Statistical Office also said that canceling health care co-payments will reduce headline inflation by 0.2pp in April, which could help inflation to fall faster in the rest of the year. We see year-end CPI at 4.9% Y/Y, but achieving the 3% target by end-2009 is still at risk.
This news however was not enough to maintain demand for the HUF and it fell to be a victim of the changing global environment and dropped to 253.00 before recovering slightly to 252.25 by close. The data together with a stronger EUR/HUF could provoke the Monetary Council to rethink the outlook and this may result in a wait-andsee trading range of around 250-255/€.

The Polish zloty fell back from 7 year highs in the 3.42 area on Friday, with the market under pressure from the broadly softer core equities in the wake of the surprisingly weak GE results and hence, from renewed fears regarding the impact of the financial crisis on the US economy.
Regarding the outlook for the week, the sentiment seems less favorable than in recent days - Friday’s price action and today’s weaker opening suggests the rally might be put on hold for now. The barrage of domestic data will be eyed closely, and while the numbers are likely to give the bond market new direction, we believe core markets will remain the most relevant leading factor for the zloty. This said, we see room for some corrective action (to, or even above EUR/PLN 3.45) if risk appetite conditions deteriorate further (in reaction to the weaker than expected US data or unforeseen credit events). Otherwise, if equities keep their composure, range trade is likely to be the prevailing scenario for the PLN for the week to come.

The Slovak koruna stayed within a narrow range around the level of EUR/SKK 32.35 on Friday. It was stronger in the morning session and corrected later in the afternoon. The foreign trade surplus in a single month was the biggest in the history. But the unit was unable to take advantage from this positive news. CPI inflation is slightly up but now it is clear that HCIP will show only a limited rise this week (Wednesday). We expect the koruna to hover in the range of EUR/SKK 32.20 – 32.30 today.

Fixed income

Czech bonds decoupled from their core market counterparts as short-term yields moved higher on Friday. Still, the longer-end of the curve benefited from positive sentiment in core bond markets and domestic longer bonds finished the week in lively trading higher.
Today, all eyes on the domestic bond market will look at the Forex market as the koruna reached unbelievable levels during the weekend off-shore trading. Hence, the short-end of the curve should benefit from such a situation and we might observe a steepening of the curve.

With the barrage of data due out this week activity had slowed to a crawl on the Polish fixed income market late last week. Even though the global conditions seem somewhat more favorable for bonds, we remain wary that Polish yields might diverge further from their European/US counterparts before convergence finally sets in. The March macro figures are widely expected to provide the market with ST direction and with the jury still out on the market’s view on the timing of the next hike and length of the current tightening cycle, yields could even head higher, before the market regains strength.
Trading should remain subdued in the hours to come ahead of the first batch of numbers (CPI and wages) tomorrow.

The Hungarian bonds had another good day as the market was still influenced by surprisingly strong demand from Thursday. By now only the 3-year area has been offering a yield of above 9%. The current positive tone is mainly a reaction to the strong exchange rate and the market could pause with the currency in the next days.

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Published on  Mon, Apr 14 2008, 08:04 GMT