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Central European Daily

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Strong koruna helps Czech bonds

Mon, Jul 14 2008, 08:04 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Fanie and Fredie crisis attracts the short term capital to the region
Fixed Income: Strong koruna helps Czech bonds

Currencies

The inflow of the short term speculative capital to the region continues. Hence the Czech koruna in line with the Polish zloty continued its rally and touched new records at 23.40 EUR/CZK. The optimism in Central Europe was triggered by the nervousness around US agencies Fanie Mae and Fredie Mac that initiated additional weakness in US dollar and global equities and support flows to safe heaven areas.
This week a lot should depend on the earnings from the US financial sector and also on the Bernanke´s testimony scheduled for Tuesday. The subsequent development of the global equities and US dollar will be crucial. If the global tensions do not cool down, the koruna will continue to stay strong.

The Hungarian forint closed Friday’s session slightly weaker at EUR/HUF 231.64 from EUR/HUF 231.23 previously. The EUR/HUF made a shy attempt to test all-time lows set on Wednesday, just below 230 but the water was too deep. The Czech koruna and the Polish zloty, the forint’s regional peers, did set new highs. However, given the huge gains of the forint recently, we understand that investors become more cautious, especially as the 230 barrier is a key one. The news flow was in general favourable though. June CPI rose by 0.1% M/M and 6.7% Y/Y, sharply below the consensus and the May headline figure of 7% Y/Y. There may already be some impact of the stronger currency, but also food played a role. The Minutes of the June MPC meeting showed that the decision to keep rates unchanged was taken 6-to-4 with governor Simor in the minority camp. The government said that it would soon determine the inflation target that should be closer to the ECB ones. At a press conference, NBH governor Simor suggested that the 2008 budget deficit may fall to 3.6% and in 2009 even to 3.2%, which would allow the government to set next year a date for euro adoption. Overall, we think the forint should take a break, as investors ponder whether the recent strong gains are justified.

With the EUR/PLN 3.25 level in sight the zloty hesitated only for a short while before shifting lower from 3.27 to fresh all-time lows in the 3.26 area. The weakening of the dollar seems to have coincided with the move, but we would rather link the PLN upmove to the start of the US session. This said we must acknowledge that even though we remain on the lookout for a technical correction following the recent strong gains, the sentiment remains positive for the zloty in the sort run. EUR/PLN 3.25 should provide the pair with strong support though ahead of the all-important CPI numbers tomorrow.

The Slovak koruna held stable close to the EUR/SKK 30.30 zone on Friday lacking any impulse. There are no major data releases on the agenda this week, only June HICP on Wednesday, usually no market mover. Nevertheless, the trading pattern should not change in days ahead with the exchange rate to oscillate close to current levels.

Fixed income

The yields on the Czech market went down again on Friday. In spite of the rise in EMU yields, Czech yields, especially the short ones, fell by 5-10bps due to the koruna rally. The strong koruna along with recent CNB board members' comments makes the picture of the next CNB meeting clearer. The positive inflation figures and firming koruna reduce the need for further monetary policy tightening. Today the bond market will again follow the koruna and therefore another slight decline in yields is probable.

Hungarian bonds gained ground on Friday as the CPI report showed lower-thanexpected increase in inflation. For today, in the absence of eco data releases, we suspect bonds to make some further gains on follow through buying on the CPI report.

Polish bonds had a fairly calm session across the curve on Friday. The market is already focused on the CPI numbers due out tomorrow, and as many investors are likely to stick to the sidelines ahead of the release, we would expect moderate activity at best today. The scale of the most recent drop in yields suggests the market has become less concerned with the prospect of inflation and interest rates heading higher. In this case, the hawkish wordings reiterated early today by MPC member Andrzej Wojtyna might draw some interest and could push prices lower for shorter maturities early in the session. Wojtyna, a former moderate – turned hawk, pointed out that second round effects remain the main medium term risk for inflation and that while the strengthening zloty has helped limit price pressures, it would not be a major threat to growth because of the rising productivity. While it seems clear that the consensus in the MPC would be somewhat more toward the dovish side, particularly with regard to the impact of the PLN on the (already) deteriorating growth outlook, Wojtyna remains an influential rate setter, so his comments will be eyed closely by markets.

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Published on  Mon, Jul 14 2008, 08:13 GMT