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Central European Daily

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Czech koruna gains and sets new high below 24 on liquidity glut

Mon, Jun 30 2008, 07:13 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech koruna gains and sets new high below 24 on liquidity glut
Fixed Income: ECB meeting and US payrolls in focus on CEE markets this week

Currencies

The Polish zloty traded slightly higher against the euro on Friday to end the week testing bids at EUR/PLN 3.36. The move back into the 3.36-3.40 range suggests that the pair will continue trading within this band in the near term. A break below 3.35- 3.36 would require a trigger and while the ECB rate decision and US payroll will be the eye-catchers in an otherwise dull eco agenda, we doubt whether either could provide the zloty with much inspiration. This said the room for corrective action should be limited as well, as exporters are already seen stepping in at levels and around 3.37 are likely to buy further into the zloty if the EUR/PLN approaches 3.40.

The Slovak koruna slightly appreciated towards EUR/SKK 30.30 on Friday, but it was only a small movement within a tight range. Neither domestic nor external factors had any impact on the unit. Prime Minister Fico said during the weekend that he would welcome a stronger conversion rate than the current central parity. So far, his words left the koruna in the cold.
We are entering a week without any significant domestic market-moving data. The most important event will be ECB meeting which should bring a rate hike to 4.25%. By this step Slovak and EU key rates will be harmonized. But we do not expect any impact on the market. The koruna is in a waiting phase for the final conversion rate and will further live its own life. We still expect range-bound trading close to EUR/SKK 30.30.

The Czech koruna failed to weaken after the CNBs attempts to cool down the accelerating appreciation trend. The overall global conditions still seems to play in favor of the Czech currency. The important factor is mainly the fall of US dollar and the sell-off on the global equity markets that creates the glut of liquidity. This liquidity tends to flow to short-term speculative position in the safe heavens like commodities or the Czech koruna, which seems to be quite resilient to the ongoing global slowdown.
Although the current appreciation of 20% y/y strongly exceeds the productivity gains, the short-term risks are, due to speculative story, skewed to further gains. If the 23.80 EUR/CZK level is broken, the space is open for the 23.50/23.00 area.

The Hungarian forint was hurt by the global risk aversion and weakened about 1% from the record high of 235.10 into the 237-239 range. This seems to be the usual risk aversion scenario that we saw earlier this year as the yen appreciation, equities fall and high-yielding emerging market currencies, like the Turkish lira or the South African rand drop in a synchronized way with the HUF.

It may be worth noting that the market was trading in the range of 238-240, before the currency had the record run and the old range could now act as a support level. May producer price data were little better (4.9% Y/Y versus 5.9% exp.), signaling that inflationary pressures are probably easing, although this figure does not reflect the most recent oil price rise to $140/barell level. Overall, the market could follow the global emerging market sentiment for now.

Fixed income

Polish yields retreated to recent highs on Friday in corrective action following the post-MPC gains seen midway through the week. The curve shifted higher by 10 bps in a flattening move which saw the 2-10Y negative spread narrow by 5-6 bps, as the long end of the curve took the hit from weakening global risk appetite conditions.
The start of the week could bring about some more profit taking ahead of the FinMin’s June inflation estimate due out tomorrow. We are looking for a relatively high result of 4.6-4.7% y/y, with the consensus roughly 0.1 pp lower, which should help keep the pressure on yields in the run up to the ECB and payrolls later in the week.

The Czech yield curve held its steepening bias after Thursday’s central bank meeting and as the Czech koruna set fresh all-time highs. The front end of the curve clearly enjoys now a combination of a neutral monetary policy stance and the strong currency, while the long end has been under heavy influence of German Bunds. Hence, for instance the spread between 2Y and 10Y swap rate widened by 4 bps.
Today, the fixed-income market – particularly the short end f the curve will continue to watch the koruna, which might extend its gains further. If it happens, there will be even more room for a drop in short-term yields. The long end of the Czech curve will definitely focus on the June euro-zone inflation, which may surprise on the upside.

The Hungarian bond market lost ground with the currency and yields rose roughly 10bps. Spreads widened more against the core market as the core market yields actually fell. There is not much to say about the current situation, the ECB meeting, possible future hike from the NBH and the exchange rate risk are the main concerns for investors, whom will likely stay cautious in the next days.

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Published on  Mon, Jun 30 2008, 10:53 GMT