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

• Send
• Print
• Add To
• Rss

Central European Daily

EUR/HUF tries to break below the 235 level

Tue, Jul 1 2008, 08:03 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: EUR/HUF tries to break below the 235 level
Fixed Income: Czech and Polish long yields track EMU yields higher

Currencies

The EUR/PLN treaded water just above of the 3.35 support level on Monday with all eyes already on the FinMin’s inflation estimate due out later today. While we had been confident the 3.35 barrier would last for some time, the upward trend for the zloty, fueled by rate hike expectations and the positive regional sentiment, seems unequivocal at this stage. Hence we would not be surprised to see the EUR/PLN retest, or even break below recent lows in case the Ministry’s inflation reading comes in above the consensus as we expect it to.

The Czech koruna opened the week close to its all-time high, which was set at the EUR/CZK 23.82 on late Friday. The koruna is getting stronger and stronger despite growing concerns of Czech exporters, which complained that the strong currency has cut their profits by CZK 80bn so far his year. Other anecdotal evidence of (a negative) impact of the strong koruna on the economy is the fact that companies are forced to combat the appreciation of the crown by using euros for domestic payments.
It seems that unless big London players change their bullish view on the Czech economy and its currency, the koruna will not weaken. So, Czech exporters will have to live with strong currency some more time.

The Slovak koruna firmed to EUR/SKK 30.14 yesterday boosted by Prime Minister’s Fico statement that he would welcome if a final conversion rate to be stronger than the current central parity (30.126). His words suggest that the conversion rate will be at least not weaker than the parity. The EUR/SKK conversion rate will be announced on July 8. Until then the koruna should fluctuate close to the current levels.

The Hungarian forint recovered quickly yesterday as global equities stabilized and high-yielding currencies strengthened. The HUF set a new record high of 234.75 against the euro, but later fell back into the 235-236 range. It seems that investors started to differentiate between risky asset classes and high-yielding currencies are able to perform well during the current period of the global slowdown because many investors are piling in carry trades as investors shift away from equities and rebalance portfolios to prepare them for further global slowdown.
The first quarter current account data posted a tad higher deficit, but non-debt capital inflow surged leading to an overall much healthier external balance picture. This reinforced the expectation for a narrower external financing gap of Hungary as the fiscal consolidation is cutting back import. Improving fundamental background could also help the currency to maintain its strength.

Fixed income

Polish bonds took yet another hit on Monday morning following the upward surprise from the Eurozone inflation and the marked reaction from core markets, before recovering some of the early losses in a profit taking move later in the session. The long end of the curve was hardest hit with yields up by as much as 10 bps and eventually turned out to be the biggest gainer in the later stages of the day. On average the curve shifted higher by 2-3 bps, a minor move given the soft sentiment in European markets.
Today the FinMin’s June inflation estimate will take center stage (10:00 CET). Even though the ministry’s track record in predicting the CPI is far from immaculate the release has taken up a prominent place in the monthly agenda, becoming an almost equally important mover as the official data release itself. The FinMin does have superior access to data though, which is why the release is eyed so closely. Regarding the reading the market sees the June CPI at 4.5% y/y, while we are looking for an above consensus outcome of 4.6% y/y, which could be slightly negative for bonds across the curve. Moreover, the risks in our view, are skewed to the upside. If the number comes on at 4.7% y/y this would mean that inflation could top the psychological 5.0% barrier late in the Summer, which could weigh heavily on the sentiment in the short run. All in all we see little reason to turn positive for Polish bonds at this stage.

The Hungarian bond market was almost dead on the first day of the week and papers ignored the currency so far, albeit we may see a late response today or tomorrow if turnover picks up a little.

The Czech bonds tracked the German counterparts and the curve steepened in bearish ways at the beginning of the week. The shorter maturities were hit the most due to higher euro zone inflation and the uncertainty ahead of the ECB meeting. Also the slightly weaker koruna did not help very much the short end of the curve.
Today the US ISM report should be in focus and we believe that the sentiment on the Czech bond market may improve slightly after the release. Also the Czech koruna may help in case it fails to come back above 24.00 EUR/CZK.

• Download Full Central European Daily

Published on  Tue, Jul 1 2008, 09:27 GMT

Archive

• 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
• Polish MPC should deliver a slight softer statement
  Published On Wed, Jul 30 2008, 07:27 GMT
• NBS to stay symbolically on hold
  Published On Tue, Jul 29 2008, 07:29 GMT
• CE currencies in a sideways mode
  Published On Mon, Jul 28 2008, 08:21 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