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

• Send
• Print
• Add To
• Rss

Central European Daily

Czech exporters to talk about the strong koruna

Fri, Jun 27 2008, 07:25 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech exporters to talk about the strong koruna
Fixed Income: CNB stays on hold, only one board member voted for a hike

Currencies

The massive sell-off in US equity markets weighed on the zloty yesterday evening as the pair retreated past 3.36 and into the 3.37 area after the official closing. The move back into the 3.36-3.40 range suggests that the pair will continue trading within this band in the near term. This would mean the prospect of a break lower past 3.35 must be put away for some time. Nevertheless we keep to our medium term view that even in case of a negative technical correction early in the summer the zloty will return to a strengthening mode after the holiday season. Our year end target stands unchanged at 3.30 for the EUR/PLN pair.

Although the Czech National Bank left it official rate unchanged and delivered to the market broadly neutral comments. The Czech currency actually firmed a bit yesterday. The EUR/CZK pair dropped to just above the 24.00 level despite the fact that CNB’s governor Tuma said that the current pace of appreciation is clearly unsustainable in a long-run. In fact, yesterday’s price action was probably rather triggered by the weaker USD, which brought the USD/CZK pair to new all-time lows.

Today, representatives of exporters will meet with CNB Gov. Zdeněk Tůma and will seek a cut in interest rates as a way to halt the appreciation. The industry ministry estimates that the strong crown had a cost to exporters in the first quarter of Kč 65bn. To combat the rise in the crown, companies are laying off workers, turning to foreign suppliers or moving production abroad. We think that the meeting might bring some noise but a real effect on the currency should be minimal. In other words we do not expect that the meeting can bring any measure or explicit support from the central bank, which would support exporter’s positions. Hence the koruna will probably remain strong in coming days.

The Slovak koruna strengthened early in the afternoon, but was not able to break through the level of EURSKK 30.25. Therefore, the unit retreated in the afternoon and stayed in the trading range of EURSKK 30.30 – 30.40. The local economic calendar contains the PPI inflation, for which the market expects a rise from 5.8% Y/Y in April to 6.1% Y/Y in May. However, the Slovak yield curve is more influenced by the shifts of the euro curve. The money market rates are higher in the Eurozone and the Slovak money market curve should gradually move towards the Eurozone level in the run-up to the introduction of the euro on January 1 2009. .

Polish bonds extended the post-MPC gains on Thursday as rate hike expectations took a hit in reaction to the softer inflation projection and suggestions by rate setters that a pause in the cycle until the autumn was a likely scenario. The short end of the curve was the star performer and the inverted curve continued to flatten.
With core markets clawing back losses as well the sentiment seems to have turned a bit more positive for bonds battered by inflation fears recently. However, while we could see yields fall again today in the wake of the massive sell-off in equity markets, we are cautious to bet on a larger down-leg in yields just yet. Inflation remains a key concern, with the headline CPI likely to reach 4.7% y/y in June and 5.0% y/y later in the summer, which should keep the upside for bonds limited throughout the summer..

Fixed income

Polish bonds extended the post-MPC gains on Thursday as rate hike expectations took a hit in reaction to the softer inflation projection and suggestions by rate setters that a pause in the cycle until the autumn was a likely scenario. The short end of the curve was the star performer and the inverted curve continued to flatten.
With core markets clawing back losses as well the sentiment seems to have turned a bit more positive for bonds battered by inflation fears recently. However, while we could see yields fall again today in the wake of the massive sell-off in equity markets, we are cautious to bet on a larger down-leg in yields just yet. Inflation remains a key concern, with the headline CPI likely to reach 4.7% y/y in June and 5.0% y/y later in the summer, which should keep the upside for bonds limited throughout the summer..

The Czech bonds took profit from the decision of the CNB to keep rates unchanged and the favorable conditions on the core markets. Central Bank comments were more or less balanced. Although governor Tuma puts more stress on the inflation risks, an interest rate hike is out of question for now given the koruna strength. That is also evident taking into account the 6:1 voting result in favour of the stable rates.
Today it might be interesting to watch the results of the meeting of the central bank governor with the head of the association of the Czech exporters. We believe that together with the favorable sentiment on the core markets it could contribute to a moderate steepening of the Czech curve.

• Download Full Central European Daily

Published on  Fri, Jun 27 2008, 07:44 GMT

Archive

• Polish central bank signals possible rate hike
  Published On Thu, Aug 28 2008, 07:37 GMT
• Czech koruna hit by weak German Ifo
  Published On Wed, Aug 27 2008, 08:00 GMT
• NBS expected to stay on hold
  Published On Tue, Aug 26 2008, 07:43 GMT
• CE currencies slightly lower ahead crucial US data
  Published On Fri, Aug 1 2008, 07:40 GMT
• EUR/CZK tested the 24.0 level
  Published On Thu, Jul 31 2008, 08:03 GMT

[ View All ]

• More Reports from this Author
• More Reports from this Contributor

KBC Bank  | Havenlaan 12, 1080 Brussels
http://www.kbc.be/dealingroom | piet.lammens@kbc.be