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Central European Daily

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The forint becomes vulnerable after Trichet's call for a July hike

Fri, Jun 6 2008, 07:37 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: The forint becomes vulnerable after Trichet’s call for a July hike
Fixed Income: Sell-off from the EMU bond market spills over to Central Europe

Currencies

The Polish zloty was little changed throughout the session on Thursday as the market ignored the ECB warning that rates could be raised already at next month’s meeting. However, with the outlook for Polish rates dependant mainly on the upcoming inflation projection and macro data, the change in the ECB policy outlook is likely to keep the downside for the EUR/PLN pair well protected in the short term.
We expect the zloty will continue trading sideways in the EUR/PLN 3.37 area, or even slightly lower against the euro today with all eyes now on the payrolls.

The Hungarian forint continued its slowly weakening trend for the fourth consecutive day and the pair moved into the 243.00-244.00 range. Hawkish rhetoric from ECB accelerated the depreciation trend in the afternoon and hawkish words from governor Simor did not help. If the market has doubts about the delivery of the expected 50 basis points rate hike (to 9%), we could see a weakening HUF towards the 250 level and a recovery later, when hikes are delivered.

The Slovak koruna continued to fluctuate in a tight range close to EUR/SKK 30.30 yesterday as the market ignored hawkish comments from ECB president Trichet and EUR/USD movements as well. There is only one implication from his words for the local market. Before, we had expected the Slovak central bank to cut its key repo rate at the end of the year and harmonize it with the ECB. Now it seems that NBS will not be forced to move its rates down. The 2W repo rate is now at 4.25% and after ECB will increase its base rate in July, the rates will be equal. Today’s trading on the forex market should not bring any novelties. We still expect range-bound trading close to 30.30.

The Czech currency extended its gains yesterday as the EUR/CZK even touched the 24.50 barrier. After Trichet’s suggestion that the ECB could move a small amount (up) in July, the koruna finally gave up some of its gains, but the EUR/CZK was no able to rebound further than to the 24.60 level.
Today, the session will begin with a brief check of the April trade balance, which will be negatively affected by higher oil prices. A bit worse-than-expected result of the foreign trade might be a small reason for a negative correction on the strong koruna. The bearish price action might also support a possible negative development in other Central European markets. Latter on, however, the koruna will definitely watch the May US payrolls.

Fixed income

Polish bond yields shot up by up to 10 bps on Thursday following the shock preannouncement by Mr. Trichet that ECB rates were likely to rise in July due to the persistent upside threats to inflation. The massive reaction on core markets was almost mirrored by the local bond market as the ECB’s change of tack suggests the Polish MPC might have some additional leeway in conducting its policy with the pressure off the strengthening zloty. The latter had been one of the major issues preventing the MPC from tightening further in recent months, and while for now we prefer to wait before changing our IR outlook (one more hike in June) for the revised inflation projection later this month, the risks are that the MPC will eventually end the cycle at 6.25% or even 6.5% if the ECB continues tightening in the Autumn.
Regarding markets the sentiment is clearly bearish in the short run and while we had been looking for some technical profit taking at currently very favorable yield levels following yesterday’s surprise from the ECB this seems a much more distant prospect at this stage.

The Hungarian bonds lost an additional 20-30 basis points yesterday on the back of intensifying global inflation fears and higher core market yields. The market really seems to be concerned about future inflation path and this remained so despite comments from the governor that central bank could tighten policy if needed to maintain price stability.

The Czech bonds came under severe pressure after the ECB meeting, where a rate hike was clearly discussed. Especially the short maturities were hit the most and even very strong koruna failed to protect them.
Today the major focus is to be on the US payrolls. If the figure does not disappoint we may see a further sell-off on the Czech bonds. Nevertheless the stronger koruna could start to play its protective role on the short end of the curve

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Published on  Fri, Jun 6 2008, 07:58 GMT