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Central European Daily

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Czech koruna extends losses

Thu, Jul 24 2008, 07:38 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech koruna extends losses
Fixed Income: CE bond markets will look at EMU and US releases

Currencies

The Czech koruna lost more ground yesterday, as a verbal intervention from CNB’s governor Tuma the day before continued to hit the currency. Hence, the EUR/CZK pair despite very strong hedging activity of stressed Czech exporters, still managed to move higher and set up fresh three weeks high at 23.83.

Meanwhile the local press brings more and more stories, illustrating that that the strong currency has already hurt the economy. For example Siemens announced that it will close its railcar factory in Prague and cut 950 jobs by the end of Sept. 2009, unless it can find a buyer. Among other things, it attributed the decision to the strong crown and rising wages. These stories will hardly improve the sentiment, which was terribly hit by governor’s warning that the central bank might cut its official rate in August. In this respect, Vice governor Signer this morning apparently tried to calm the storm as he said that 10 Y/Y appreciation is not a problem for the central bank.

The weakening koruna and strengthening dollar led the zloty lower against the euro on Thursday in an extension of the corrective move which began the day before. The EUR/PLN found it difficult to tackle the 3.2650 level as the CZK leveled off later in the session though. While the strong overnight performance put in by equity markets and the drop in oil prices both suggest the PLN will remain under pressure in the run up to the weekend, we keep to our view that the extent of the current correction will be limited as exporters step into the marketplace. However, a break above EUR/PLN 3.2650 would open the road to the 3.2750-3.30 area.

The Slovak currency slightly weakened in line with the regional trend, but corrected later on. The unit is hovering close to its official conversion rate. EUR/SKK spiked to 30.430 but cannot dip further beyond this limit. The koruna might officially move in both directions, but it does not make sense to depreciate too much above the level of 30.126 (conversion rate) plus forward points (11-18 hellers). Czech koruna weakened by 1.5% on Wednesday. This led to a SKK gain against the CZK by 1.4 percent. CZK/SKK reached its multi years peak on July 21st (1.3216) and is in the correction phase since then. Today, the local calendar is empty and all eyes are on the European figures. The PMI’s and IFO could have the potential to drive the market sentiment and rates as well. This might have indirect impact on the EUR/SKK rate through the interest rate differential.

The Hungarian forint continued its correction and the pair reached yesterday a new 1-week low of 234.05. Easing inflation concerns, strong USD and general weakness in CE3 currencies have all fueled the weakening and these factors do not seem to have run out of fuel yet. The 235 level could lean some support to the currency today.

Fixed income

Polish bonds continued to slide lower in prices along with the weakening zloty on Wednesday in a delayed reaction to the rise in core European yields earlier this month. Over the last week or so the curve has risen by up to 20 bps from the recent month long lows with the move most profound in the liquid 5Y segment. We believe the uptrend might last in the short run unless the zloty resumes its march higher. The retail sales numbers (10:00 CET) will be eyed with attention today, but with the zloty likely to remain the major ST market driver and inflation (CPI ,wages) being the fundamental driver in the longer run, we doubt whether the release will be of major importance unless the outcome deviates strongly from the consensus. We are looking for a consensus-like 15.5% Y/Y reading, which would be neutral across the curve.

Czech bonds lost slightly along the whole yield curve on Wednesday. Trading volumes were high due to the Ministry of Finance selling papers from its reserves. The domestic scene gave no fresh stimulus, hence the increase in yields may be derived from stock market gains and the Czech Koruna weakening.
No fresh statistics are released today. This morning vice CNB governor Mr. Signer tries to calm mark sentiment after previous governor’s verbal intervention against the strong koruna. Mr.Singer said that 10% y/y domestic currency appreciation presents no problem for the CNB. Nevertheless, domestic bonds will rather pay attention to the foreign calendar, which will become quite interesting both in the US and EMU.

Hungarian bonds were broadly stable yesterday, but the currency weakened more than 1% during the day. So, bonds may catch-up to the currency today. The medium- term outlook is positive in our view as Hungarian inflation is expected to decline significantly during the second half of the year, thus the current correction could be a good buying opportunity.

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Published on  Thu, Jul 24 2008, 07:48 GMT