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Central European Daily

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NBS to stay symbolically on hold

Tue, Jul 29 2008, 07:29 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech PM favors strong currency as it eases inflation pressures
Fixed Income: NBS to stay symbolically on hold

Currencies

The Czech koruna hovered in tight range yesterday as the market obviously slipped to a wait-and-see mode ahead the central bank meeting scheduled for August 7th. The koruna even shrugged of the dispute between the PM and leader of left-wing opposition Paroubek, who has recently expressed his support for a fast EMU entry. This dispute has fallen into a second stage today as Topolánek said in response to comments yesterday by Paroubek that the strong crown does not present a threat and instead serves as an objective indicator of the state of the economy. According to PM the strong crown might be unpleasant for some interest groups, he added, but not for consumers. The real threat is high inflation, and the strong crown eases it, he said.
Though interesting this debate will have only a limited impact on today’s trading. In this respect more important could be, if global risk aversion spikes again. This has been a key factor to support the currency in recent months.

The Polish zloty held to an extremely tight range in the EUR/PLN 3.20-3.21 area on Monday with all eyes already set on the MPC rate meeting which starts today. Markets have been speculating on whether the MPC could switch to a neutral stance already this month in the light of the most recent strengthening of the zloty, and while we doubt whether this will be the case (we are looking for a little changed statement, possibly with some additional references to the exchange rate), this might be enough to keep the zloty from appreciating past EUR/PLN 3.20 in the run up to the decision.

The Hungarian forint remained broadly unchanged around 231 on Monday and trading had a low volume throughout the day. It seems that lot of people have gone on holiday this week and emerging market currencies moved against each other, like ZAR or the ISK. The oil company MOL announced another 2% decrease in fuel prices this week, which means the inflation could drop by 0.2pp this month due to cheaper oil. Things may heat up later in August, when central bank will release the new Inflation Report together with the rate-setting meeting.

The Slovak koruna held a very tight range of EUR/SKK 30.34 – 30.40 during the whole session on Monday. The Czech koruna booked a small profit against the reference Euro currency. Therefore, the CZK/SKK currency pair moved higher (SKK is weaker) and is now hovering around the level of 1.282. Risk aversion on the global market is back (weakening dollar and equities) and this could support assets with healthy fundamentals (including CE3 currencies). If this is the case, SKK might record further losses against CZK (SKK exchange rate is basically fixed after the release of the conversion rate).

Fixed income

Czech bonds gained yesterday, but with very low trading volumes. As no incentives appeared from the domestic scene their price increase should be dedicated to core markets’ movements and the strong koruna.
No fresh data is released even today. Hence, Czech bonds should copy eurozone markets again. However, the strong domestic currency should prevent any significant rise in short-term rates.

Polish bonds traded higher in prices on Monday ahead of the MPC rate decision on Wednesday with the positive sentiment fueled speculation that the MPC might try to soften its stance markedly given the most recent pace of zloty appreciation (more in FX part). Interestingly is that the rise in core market yields was basically ignored. We see no reason to become negative on bonds in the run up to the Council vote, but if the upswing (in core market yields) is continued this would open the room for Polish yields to rise markedly in case the MPC comes out with a reasonably hawkish communiqué (which we think seems likely).

Hungarian bonds were dead stable yesterday, despite cheaper fuel is improving the inflation outlook. The market is almost frozen and there may be no significant movement for a prolonged period.

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Published on  Tue, Jul 29 2008, 07:35 GMT