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Central European Daily

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CE currencies in a sideways mode

Mon, Jul 28 2008, 08:21 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CE currencies in a sideways mode
Fixed Income: Polish yields inch lower after weaker retails sales

Currencies

The corrective move which pushed the EUR/PLN into the 3.2650 area midway last week proved temporary, and was rapidly reversed after the koruna leveled off and equities took a hit from softer economic data and weaker earnings numbers. The EUR/PLN eventually ended the week testing bids at fresh all time lows in the 3.2050 area. While the pair should encounter strong resistance at this stage, we would not be surprised to see the zloty attempt to break below EUR/PLN 3.20. However, consolidation seems the most likely ST scenario for the PLN in the run up to the allimportant rate meeting which starts tomorrow.

The Hungarian forint surprisingly strengthened on the last day of the week. Increased risk appetite worldwide was behind the move as emerging market currencies moved higher on a lower oil price and as the US government’s aid to the large mortgage enterprises brought a relief to markets.

The forint touched the EUR/HUF 231.00 level briefly, followed by stable trading around the 232.00 level. The 16th consecutive decline in retail trade volume had no impact on the market now, although the subdued domestic demand should help the currency in the medium-term through an improvement in the external balance. The outlook is neutral for now.

The Czech koruna once more tried to firm back to stronger levels, but once again failed. The EUR/CZK pair dipped to the 23.55 level, where it set an intraday low, but later on this price action was completely reversed. It is worth adding that the hawkish M. Hampl mentioned in his online interview that he would not attend the Aust 7th meeting. We do not think that it should fundamentally affect the voting, which is expected to result in an ‘on hold’ outcome. As the local press brings more evidence that the strong koruna hurts some part of the economy (another textile company will shut down and let go its 178 employees) the political debate on the currency heats up. Ex- PM Jiří Paroubek said in today’s Czech economic daily it was a strategic mistake for the current cabinet to put off adoption of the euro. It is clear, he said, that the sharp appreciation of the crown is linked to the euro. For PM Topolánek to claim otherwise, he said, is way off the mark. If the CR were on track to adopt the euro, Paroubek argued, speculators would be more careful about exposing themselves. He said that his Soc-Dem are willing to meet with the government about setting an adoption date. Although these discussions are interesting, we think they will not really affect the currency, which should stay in a sideways mode ahead of the CNB meeting.

The Slovak koruna was flat during the Friday session. The unit oscillated in the range of EUR/SKK 30.30 – 30.40, while the CZK/SKK pair shot up from 1.2818 to 1.2905 or 0.7 percent in the morning. Anyway, the unit corrected later on to 1.2780 as the Czech currency depreciated against the single European currency. The eco calendar contains the PPI data today, which shouldn’t be considered as a market mover.

Fixed income

Polish bonds inched lower in yields on Friday after the retail sales numbers came in lower than expected and the zloty tested new historical highs against the euro. Sales were up by a decent, yet below-par, 14.2% Y/Y in June despite the favorable working day effect, fuelling fears that consumption had taken a hit as well following a soft industrial output reading earlier this month. We would not read too much out of the release though, first since monthly data tend to be volatile and second, as the dynamics remained quite strong in a historical perspective. A stronger slump in consumption would require softer labor market conditions, and while this is likely in the medium term, in the short run annual sales growth should stay in the double digit range. Regarding today’s session the soft performance in core markets late on Friday, initially ignored by Polish bonds, could weigh on the sentiment as the market gears up for the rate decision on Wednesday.

Hungarian bonds were broadly stable and interest remained low. The market is missing on a convincing story after the recent rally lost momentum. The short-end is looking for a rate cut, but only around the year-end, thus there is no reason to position on this now, while tighter spreads at the long-end (5Y5Y forward swap narrowed to below 200bps over the euro) make the convergence play less attractive than some weeks ago. The medium-term outlook is still positive, but we may need some time for fundamentals to improve further before the next round starts.

On Friday with low holiday trading volumes, the Czech yield curve flattened slightly, with the short end gaining up to 1 bps and the long one losing up to 1 bps. No domestic data were released, only vice governor CNB Mr. M.Hampl’s internet conference raised some interest. It is worth mentioning that Mr.Hampl expects that bank inflation target could be reached at the beginning of 2009. No important events are expected today. Moreover, the Czech government has started its 3- week holidays. Hence, we expect a sideways movement with holiday’s volumes. Only unexpected and surprising events abroad could awake the market from summer lethargy.

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Published on  Mon, Jul 28 2008, 08:32 GMT