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

• Send
• Print
• Add To
• Rss

Central European Daily

3209b411-13b0-47a2-8f9e-b074e030a28f

0

0

The koruna tries to fight back – unsuccessfully so far

Fri, Jul 25 2008, 10:24 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: The koruna tries to fight back – unsuccessfully so far
Fixed Income: Polish retail sales will be eyed with attention today

Currencies

The Czech koruna tried to come back yesterday but its attempt to firm failed as the EUR/CZK did not break below the 23.500 support level. Obviously the currency has been supported by hedging activity of Czech exporters, who want to utilize weaker levels of the Czech currency for their business. Nevertheless, until the big London players joint them, the koruna will hardly firm closer to its all-time highs or to the EUR/CZK 23.0 level.

Today, the only interesting item on the agenda on the domestic front could be an online interview with CNB’s vice-governor Hampl at the most popular Czech web server. Hampl has been currently the only member, who voted for rate hikes. We, however, do not expect that Hampl would deviate too much from other governors’ dovish comments made this week, because it would only negate the CNB effort to weakenen the koruna. Hence, we do not expect the EUR/CZK to leave the range of 23.5-24.0

The leveling out of the koruna was enough not only to stop the zloty from weakening against the euro, but to regain all the ground lost during the technical correction which brought the EUR/PLN up from 3.22 to the 3.26-3.27 area. Rate hike expectations remain intact with rate setters apparently still more concerned with inflation, wages and the risk of second round effects, rather than the negative impact of the strengthening zloty on growth. The soft performance of equity markets and the renewed weakness in the dollar all suggest the zloty will end the week on a strong note. While we should see strong support already at the EUR/PLN 3.22 level, a break lower into the 3.20 area is not out of the question.

The Hungarian forint’s correction took a pause yesterday as emerging market currencies received additional demand from lower core market yields. There has been however still mixed signals whether the weakening trend had ended or not as the downturn on global equity markets could lead to risk aversion and may weigh on currencies, as well. Retail sales data showed another month of contraction for the 16th time in a row, which is taking place despite real wage growth. This is suggesting that households are probably spending less than they earn, thus the saving ratio is probably improving. Sluggish domestic demand may be an additional positive factor behind the HUF, which could help it to maintain its strength for a longer time.

The Slovak koruna stayed in the range close to the level of EUR/SKK 30.38. Anyway, the two different periods on the EUR/CZK currency pair also influenced the Slovak koruna against the CZK. SKK was losing 1.3 percent around noon against the neighboring Czech currency. The Czech Republic is the second most important trading partner of Slovakia with 12.4% share on total exports in 2007. Germany is number one with 21.5% share on total Slovak export during the previous year. Therefore, strengthening Czech koruna (weakening Euro) is in the favour of Slovak exporters as the Euro will be the Slovak domestic currency very soon. Anyway, the EUR/CZK and CZK/SKK are now in the correction mode. The EUR/SKK currency pair is expected to stay quiet today.

Fixed income

Polish bonds recovered nearly all the ground lost in the early stages of the week on Thursday as the firming zloty and stronger core markets brought buyers back to the market. While the sentiment seems to have improved up to a point where speculation on a lengthier down-leg in yields might surface, we are cautious to bet on a considerable extension to yesterdays rally in the run up to the weekend unless the zloty continues to march higher against the euro. 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.

Hungarian bonds rallied some 10bps as core market yields lowered and demand for high-yielding sovereign risk assets improved. The 10-year benchmark yield edged down to its 3-month low of 7.80% level we saw last week.

Czech bonds continued rising yesterday. Yields lost up to 8 bps and the yield curve flattened. As no domestic data was released the market with average holiday’s trading volumes followed the eurozone markets’ movement. Also Thursday’s share market loss together with CNB governor Tuesday’s warning that the strong currency may initiate a rate cut continued to play their role on the bond market.
No fresh domestic data is released today. Hence, the Czech bond market should follow core markets and could keep investors’ interest even today. It is worth to mention that CNB member Mr. M.Hampl has a discussion in the afternoon. His remarks about CNB policy and his opinion about rate changes could also influence investors’ decisions.

• Download Full Central European Daily

Published on  Fri, Jul 25 2008, 10:42 GMT