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Central European Daily

EUR/SKK tests the 32.0 level after positive EC assessment

Fri, May 9 2008, 08:42 GMT
by KBC Market Research Desk

KBC Bank

Headlines

• Currencies: EUR/SKK tests the 32.0 level after positive EC assessment
  
• Fixed Income: CNB’s dovish rhetoric triggers sharp drop in FRA rates
  

Currencies

The Slovak koruna broke the psychological level of EUR/SKK 32.0 on Wednesday boosted by positive EC convergence report that gave the green light to the euro zone. The new all-time high is at 31.985.

According to the EC Slovakia fulfils all Maastricht criteria in a sustainable way. This definitely confirms the country’s bid to become the 16th member of the euro zone as of 1 January 2009. On the other hand, ECB said in its report that is has considerable concerns about whether Slovakia is able to keep inflation under control. This was no surprise as ECB sounded quite critical in previous weeks.

 Now, the formal procedure by different EU authorities is on schedule. The EU Council will have to abrogate the excessive deficit procedure against Slovakia. On the European Council Summit (19-20 June) the country will get a formal approval. The only open issue remains the final conversion exchange rate which will be announced at ECOFIN meeting on July 8. We continue to expect a second central parity revaluation to a level EUR/SKK 32.50. On the other hand we have to admit that risks exist for a stronger rate.

We expect the koruna to stay at strong levels around EUR/SKK 32.0 in upcoming days. Today’s macro data while interesting, should not be the driver for the currency pair.
 The Polish zloty edged higher on Wedneday as regional currencies drew support from the positive recommendation regarding Slovakia’s eurozone entry by the EC, and held on to these gains throughout yesterday’s session. The EUR/PLN pair inched into the 3.41 range and even tested bids below 3.39 for a short while in offshore trading. FinMin Jacek Rostowski commented on the Commission’s recommendation saying that the fact that the criteria were treated literally boded well for Poland’s euroentry. Rostowski reiterated that ERM-2 entry would be possible in January 2009, which would put the earliest possible EMU accession data at 2011. We think while this might be technically possible, a slight ERM-2 delay (to mid 2009 or 2010) is likely to push accession back to 2012 or 2013.

 Regarding trading, the sentiment should remain positive in the ST as the market continues to appreciate the smooth road of Slovakia to the euro. However 3.40 should continue to provide ample support for the pair.

 Today the Czech forex market resumes trading after one day off. The market still has to digest two important Bank Board meetings – CNB’s and ECB’s. We expect the dovish tone coming from the CNB coupled with ECB Trichet’s anti-inflationary comments to be no favourable mix for the koruna. Hence, we expect that more koruna’s easing is in the pipeline and bullish sentiment in the neighboring Slovak market will probably not be able to reverse it.

Fixed income

Polish yields shot up across the curve in anticipation of the primary 5Y benchmark tender on Wednesday. Given the negative price action beforehand, the auction itself went rather well. With over PLN 3.1 bn worth of bids the FinMin had no problems in placing the entire PLN 1.8 bn offer at an average yield just under secondary market levels.

 While we doubt whether the market will turn bullish at this point given the upside risks to inflation and rate hike expectations the strong results of the auction are likely to put a stop to the rise in yields in the days to come, particularly in the 5-10Y segment. As if to confirm this yesterdayn, the long end of the curve followed European yields lower to end the day trading at 6.15% in the 5Y segment and just above 6% in for 10Y benchmark.

 The outcome of Wednesday’s CNB Bank Board meeting had a positive impact on the Czech fixed income market. It was predominantly a new inflation report and namely an unveiled implicit trajectory of short term interest rates, which supported Czech fixed income assets. The projection now expects that 3M PRIBOR should be 2.8 %, which affectively means three or even four cuts in an 18 months horizon. Even though we do not think this outcome is realistic, the market took this as positive information, which for instance triggered a 7 bps fall in FRA rates and around a 10 bps reduction of long term bond yields.

 Regarding today, the domestic calendar is empty so the market will rather try to catch up the developments on core bond markets as there was no trading yesterday.

• Download full report with charts

Published on  Fri, May 9 2008, 09:08 GMT

Archive

• ECB rate hike may weigh on regional sentiment
  Published On Thu, Jul 3 2008, 07:41 GMT
• Czech koruna gains and sets new high below 24 on liquidity glut
  Published On Wed, Jul 2 2008, 07:21 GMT
• EUR/HUF tries to break below the 235 level
  Published On Tue, Jul 1 2008, 08:03 GMT
• Czech koruna gains and sets new high below 24 on liquidity glut
  Published On Mon, Jun 30 2008, 07:13 GMT
• Czech exporters to talk about the strong koruna
  Published On Fri, Jun 27 2008, 07:25 GMT

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