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Central European Daily

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EUR/CZK tested the 24.0 level

Thu, Jul 31 2008, 08:03 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: EUR/CZK tested the 24.0 level
Fixed Income: NBP leaves rates on hold as expected

Currencies

The Polish zloty retreated from the EUR/PLN 3.20-3.21 area to 3.22 ahead of the all-important rate decision before recovering all of the losses in afternoon trade after the MPC came out with a fairly strong message that rates might have to be raised again this year (more in FI part) despite the deteriorating growth outlook and strengthening zloty. With rate hike expectations more or less intact following the meeting, the market might look at the technical picture for trading ideas. So far 3.20 has provided ample support for the pair and this should remain the case in the run up to the payrolls tomorrow.

A series of dovish comments and a stronger USD have made life for the strong Czech currency harder. No surprise that the EUR/CZK (though unsuccessfully) tested the psychological level 24.0. The market is clearly afraid that the Bank Board will really cut rates next Thursday, which is visible from falling money markets rates. Hence, the koruna will hardly make sustainable rebound to its all-time lows, even though for many Czech exporters these levels seem to be interesting to hedge their positions.

The Hungarian forint reversed the gains this week and headed for the 232 level again after CZK dropped 1% during the day and investors were moving away from CE3 currencies. Interestingly, the Turkish lira gained more than 1%, thus emerging market currencies are quite separated from each other.

The Slovak koruna traded around the level of EUR/SKK 30.38. New FDI are on stream. Sony announced it invited new supplier for its LCD plant, located in the Nitra region in the western part of the country. The new investment should be in the amount of SKK 7.25bn (EUR 240 mil.) and creates 2670 new jobs. This should be positive for exchange rate if it was not fixed. The local currency appreciated by more than 1 percent against the neighboring Czech currency. The local calendar is empty today.

Fixed income

The Polish curve inched higher by several basis points across all maturities after the MPC came out with a slightly softer, but still hawkish statement following the widely expected decision to keep rates unchanged. The softer growth perspectives (already envisaged in the June inflation projection) and the impact of the strengthening zloty were mentioned as major medium term anti-inflationary factors, but the balance of risks for inflation was still seen negative in the light of the strong labor market and continued the rise in unit labor costs. The risk of second round effects was seen as tangible with inflation expectations set to remain elevated in the current inflation environment and the projected rise in energy prices in the medium term. At the same time the Council reiterated its motto from June that a fuller assessment of the inflation and growth outlook will be possible as fresh data flows in, in the near future. Hence the Council remains in a wait-and-see mode for now, with the next move still likely to be a hike. We continue to look for the ultimate fine-tuning move to 6.25% in October. As for today’s trading yields might continue to rise early in the session, particularly given the rebound in equity markets. Later on the market should return to consolidation mode ahead of the payrolls and FinMin’s July CPI estimate due out tomorrow.

On Wednesday Czech bonds in average trading volumes gained. No fresh data were released, but a set of CNB members’ declarations, the last one from Mr.P.Rezabek, alluding interest rate cuts together with eurozone bond markets developments were enough and sent domestic papers yields lower up to 12 bps and the yield curve steepened. There are no new domestic incentives today. A week ahead of CNB meeting their members cannot continue discussing currency and interest rate problems. Hence, low yields and euro zone market influence might initiate profit taking especially when also the Czech currency weakens. However, the price drop should be modest only and the market could also monitor the koruna if it continues in its weakening trajectory.

Hungarian bonds remained unchanged during the day despite the better PPI data, released in the morning, which could predict a better CPI outcome for next week. PPI declined to 4.6% from 4.9%, as was expected by the consensus and this is suggesting that inflationary pressures are easing in the economy. Light volume however could keep bonds flat as long as the currency keeps the range-trading mode and this seems to be the case for now.

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Published on  Thu, Jul 31 2008, 10:29 GMT