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Central European Daily

ECB rate hike may weigh on regional sentiment

Thu, Jul 3 2008, 07:41 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: ECB rate hike may weigh on regional sentiment
Fixed Income: CEE bonds in wait and see mode ahead of ECB and US payrolls

Currencies

The Polish zloty traded flat locked in a tight range between EUR/PLN 3.35 and 3.36 yesterday ahead of the all-important ECB meeting on rates and US payrolls later today. As expected, the EUR/PLN has found it hard to make the decisive break lower, past 3.35 in the tighter liquidity conditions. We still expect the pair would need a strong trigger to complete the move and to head into the 3.3250 area. A no-hike decision might just suffice, but since we believe the ECB has no alternative but to raise rates, the zloty is unlikely to gain much on this. Also the for the June payrolls we put the risk to the downside, which would be detrimental for the overall sentiment. All-inall while we doubt whether a deeper ST correction is possible at this stage, we see the upside for he zloty limited as well and cautiously bet on more range trade, possibly with some upside risks for the EUR/PLN.

The Hungarian forint had a quiet day hovering between 236 and 237 as neither local nor international news brought any surprise. Today’s auction of the 3-year bond will be the key event beside the ECB meeting as demand for bonds gives us important information about sentiment.

The Czech koruna came back above 23.70 EUR/CZK and ignored the further USD sell off on the global markets on Wednesday. This may have been due to the nervousness ahead of ECB and payrolls.
These are the main highlight of today’s sessions. Although ECB rate hike should have a rather negative impact on the regional sentiment, the Czech koruna may outperform. That could be the case if the payrolls come out weaker than expected and the US dollar sell off goes on. This could trigger some speculative buying from the global investors that dump the US dollar and target 23.50 EUR/CZK levels.

The Slovak koruna slightly depreciated yesterday as it moved from EUR/SKK 30.20 to 30.30. This move was in line with regional tendencies and the activity on the market was quite calm.
Today, the domestic eco calendar is empty and so traders will focus on the ECB meeting and US payrolls. As it is expected that the ECB will raise rates by 25 bps, Slovak and European interest rates will be harmonized. Nevertheless, this should not have any impact on the market as this step is fully priced in. The koruna should further fluctuate within its established range of EUR/SKK 30.20 – 30.30.

Fixed income

Polish fixed income markets had a terrible session on Wednesday as yields soared higher by 8 bps on average following the strong PPI and the weak Bund auction. There were also some hawkish comments by Mr. Trichet, but these were done more than a week ago to Die Zeit and didn’t bring much new to the market place. The market attempted to claw back some of the early losses later in the day, the rebound was much weaker though than in core European markets. Technical factors in the tight liquidity conditions might have played a role in yesterday’s sell-off so we would not draw too many conclusions from the price action. We could even see the recovery continue early today, with all eyes on the ECB rate decision and payrolls later in the session. While it seems the job report could provide the market with some positive stimulus, the ECB call is unlikely to deliver much, if any, good news for bond markets. This said we might see higher volatility today ahead of the long US weekend.

The Hungarian bond market lost some bps in yield terms as higher core market yields were pushing yields a bit higher, but the weakening has been limited so far due to the still strong currency. It seems that recent market optimism has receded on the back of less favorable international market conditions and uncertainty on global markets. This decreased interest for HGBs.

Czech rates and yields tracked their European counterparts higher yesterday. While bond yields move up by around 2 bps, swap rates finished actually even higher, so there was some tightening of asset-swap spreads.
Today, all eyes are definitely on the ECB and the US payrolls as the market reaction following these two crucial events will define trading in the Czech market too. So, the market will stay in a wait-and-see mode. Local press stories however indicate that commercial electricity rates may jump by as much as 20% in January 2008, which could force some companies to raise their prices. If it happens (such an increase must be still approved the State energy office) it will have definitely negative consequences for the outlook of headline inflation.

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Published on  Thu, Jul 3 2008, 09:39 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

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