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Central European Daily

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Koruna firms thanks to weaker USD, eyes the March foreign trade

Tue, May 6 2008, 07:40 GMT
by KBC Market Research Desk

KBC Bank

Headlines

• Currencies: Koruna firms thanks to weaker USD, eyes the March foreign trade
  
• Fixed Income: Polish bonds consolidate ahead of tomorrow’s 5Y tender
  

Currencies

The Polish zloty traded flat in the absence of UK based players on Monday. The market ignored both the FinMin’s CPI estimate (more in FI part) and several comments by rate setters, as they basically confirmed expectations regarding the rate hike in May-June.

With market activity still on the downside and no relevant events on the global calendar the EUR/PLN pair should remain in a sideways mode at around 3.44 before liquidity conditions return back to normal later this week.

The Czech koruna firmed against the euro supported by USD losses. The EUR/CZK could also dip because of the upcoming central bank meeting as some market players might bet at least on a more hawkish tone coming from new inflation report (which will not be the case in our view).
Today, the key domestic market mover might be the March foreign trade figure, which should bring another robust surplus. This should help the EUR/CZK pair to move closer to the 25 big figure. An eye catcher could be also a very successfully domestic IPO on the Prague stock exchange (NWR stock). Nevertheless in our view it should have a neutral impact on the forex market.

Similar to other markets in the CE region, the Slovak koruna opened the week with thin activity as London players were absent due to a holiday. The EUR/SKK pair was frozen at 32.24 level and did not go anywhere the whole session.
We expect more range trading to follow today as the market gears up for the publication of EC and ECB Convergence report on Wednesday. As we have already suggested yesterday, a positive tone of the report might support the local currency and we do not exclude a test of last all-time high at 32.19.

Polish bonds had a very calm session just like the zloty. The FinMin’s April inflation estimate of 4.1% y/y was basically in-line with the consensus and was hardly enough to make an impact on trading. Comments by rate setters Marian Noga and Jan Czekaj were also ignored as they showed that a consensus within the MPC to hike rates in May or June is likely to be reached. Czekaj, who is seen as the median voter and was most likely the one who tipped the scale for a no hike outcome last month, acknowledged that a May hike would be possible if data from the real economy were strong enough. At the same time the ultra hawk Noga indicated that a hike in June rather than May seemed more likely as the Q1 GDP numbers and the inflation projection will be available by then. Our baseline scenario is that the MPC will stay on hold this month before ending the cycle at 6.0% in June. At the same time we put the risk to this scenario to the upside for interest rates and hence also for yields in case of a surprise hike in three weeks time.

Regarding today’s trading we should see the market consolidate further ahead of tomorrow’s 5Y benchmark tender. Primary auctions have been a disappointment over the last while and we doubt whether this tender will be any different, which is one reason why we believe prices are unlikely to rise across the curve in the days to come.

The Czech yield curve was little changed on Monday. It tracked the flattening of the German curve as especially the middle and the long end of the curve were in good condition.
Today the calendar of domestic events is empty. Hence the Czech bonds should stay in wait and see mode ahead of the Wednesday’s CNB meeting and Thursday’s ECB. A stronger koruna may limit the flattening trend observed during yesterday’s session.

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Published on  Tue, May 6 2008, 07:55 GMT