• Home ::
• Fundamental ::
• Market View ::
• Central European Daily

• Send
• Print
• Add To
• Rss

Central European Daily

5656c882-1933-4f0b-93c7-3fbb8288f76a

0

0

The Slovak koruna strengthens further despite cautious regional sentiment

Fri, May 23 2008, 07:28 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: The Slovak koruna strengthens further despite cautious regional sentiment
Fixed Income: Czech government starts the presentation of Eurobond emission on Monday

Currencies

The Slovak forex market continues to believe in strong conversion rate. This idea is supported by the local authorities and the EU officials do not oppose it or at least did not oppose it so far. The local currency strengthened by around 0.3% till noon. It erased part of its profits later but Thursday’s gain is still 0.2% and the new all time high was EUR/SKK 31.122. Anyway, the koruna is still marching south and this morning hit the level of EUR/SKK 31.110. We wrote earlier this week that we expected a test of the EUR/SKK 31.0 level till Friday. The market might bet on a parity revaluation as it is Friday and SKK might dive deeper today. The local eco calendar is empty and the external calendar could have only very limited impact. We recommend staying short EUR/SKK.

The Hungarian forint had a correction on Thursday after a 4-days rally, which has brought the currency to a 3-year high. The pair slipped into the 244.00-245.00 range with testing the low of 245.35. Apart from the weaker PLN, there has been no specific news behind this move. So, it looks like a normal correction after the steep appreciation from 250 to 243. The 247-248 range could be a strong barrier if the weakening continues, while tad stronger PLN and other emerging currencies suggest that we may see some stabilisation around 245. The next key event will be the central bank’s meeting on Monday, where consensus and we expect the last 25bp hike to 8.5%.

The Polish zloty fell victim to pre-weekend profit taking on Wednesday as the EUR/PLN pair edged higher past the 3.40 mark to end the session testing bids at 3.41. Yesterday local markets were closed but in off-shore trading the EUR/PLN was seen at 3.42, where we believe the zloty will continue to stumble upon strong resistance.
Today activity should be minimal as many local players will be on leave during the long weekend. The range for today is EUR/PLN 3.40-3.42.

The Czech koruna stayed more or less unchanged on Thursday. Although there were some attempts to push EUR/CZK higher, the volumes were quite low and the koruna ended the session near 25.15. The sentiment on the global markets remains rather unfavorable for the Czech currency. Beside that also the technical factors including MACD and Bollinger continue to point to a further negative correction. We see the next barrier to pause at 25.30 EUR/CZK.

Fixed income

According to data published by the CSO on Wednesday Polish industrial production growth recorded a strong rebound to 14.9% y/y in April. The result, due mostly to the larger number of days than a year ago, was nearly spot on our estimate and slightly above consensus. At the same time the 11.9% y/y rise in deseasonalised output confirmed that the industrial sector remains in good health and that the slump in March had been a one-off event. While we could see weaker results for May (again due to the working days effect), we expect the following months will show stable double digit grow in output. At the same time later in the year exporters are likely to feel the pressure from the strengthening zloty and the deterioration in external demand which could weigh to the downside on output and in consequence on GDP growth. PPI growth came in spot on our estimate of 2.5% y/y and visibly below the consensus of 2.8% /y/y, with the strengthening zloty responsible for the softer rise in PLN-term commodity prices. Al-in-all however the data were less of a market mover than we had thought they would be, because of the disastrous switch auction earlier in the day. The FinMin wanted to exchange roughly PLN 20 bn worth of bonds maturing this year for the 2, 5 and 10Y benchmarks, but in the end it decided to reject all bids. This led to an immediate rebound across the curve as those players who had sold bonds ahead of the tender were forced to buy them back at market prices. As a result yields shot lower by 15 bps on average, back to levels seen at the start of the week.
Today the market re-opens following the holiday on Thursday and even though yields could edge somewhat lower in an extension to the post-auction move, activity should be minimal as many local players will have taken the day off. The calendar heats up next Wednesday with the MPC decision on rates and the penultimate batch of eco data this month (retails sales).

The Hungarian bonds did not move yesterday, neither the currency nor the auction of the 5-year bond had any major impact on yields. The auction saw decent demand of HUF120bn against 50bn supply, while the maximum accepted yield was 8.95%. Investors are mainly focusing on the inflation risk and while the risk is on the downside for yields at the current strong exchange rate level, we may need some positive news on the inflation front to get that. Central bank’s meeting and new report could signal a somewhat better underlying inflation trend, but due to the recent rise of energy and food prices, investors will need a long-term approach to buy on this.

Czech bonds lost in thin trading volumes on Thursday. No fresh domestic data was released and the market found its inspiration on the core markets. However in contrast with the German market the yield curve steepened up to 7 bps.
On Monday the Czech Ministry of Finance starts a three days presentation of a eurobond emission in six European cities. It takes part in Frankfurt, Munich, Amsterdam, Paris, Dublin and London. Final conditions depend on investor interest, but the Ministry has in mind a volume of EUR 1 bln and a 10 to 20 years maturity. If the emission is successful, the Ministry may prepare another one for the second half of the year. No new events are released today. The market should take its inspiration abroad again.

• Download Full Central European Daily

Published on  Fri, May 23 2008, 10:14 GMT