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Central European Daily

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CE currencies slightly lower ahead crucial US data

Fri, Aug 1 2008, 07:40 GMT
by KBC Market Research Desk

KBC Bank

during the summer break there will be no central european daily, we will resume the publication from august 26

Headlines

Currencies: CE currencies slightly lower ahead crucial US data
Fixed Income: 3Y and 15Y bond auction in Hungary met strong demand

Currencies

The Hungarian forint extended this week’s losses yesterday and the pair traced back to the 2-week low of 234.40, which could potentially lead it to levels above 235, which would mean a 1-month low. The turnaround in global sentiment after the weaker US GDP data brought back risk aversion attitude quickly, which triggered position closings all around the high-yielding emerging currency class. The 235/€ level could be an important support level for today and if broken, market could eye the next key level at 238.00.

The Polish zloty tracked the forint lower in a corrective move on Thursday, with the EUR/PLN testing bids at 3.22 in offshore trading. We remain skeptical on whether the correction could go much further since local exporters are likely to step into the market in case the zloty weakens even slightly. However, the pair could edge higher temporarily today if the FinMin’s CPI estimate comes in below expectations (more in FI part). The regional sentiment seems unsupportive in the short run as well, although so far this had only stopped the zloty from rallying further, past the 3.20 mark, which has provided ample technical and psychological support for the pair.

The Czech koruna made another unsuccessful attempt to break above the EUR/CZK 24.0 resistance yesterday. Thus, the EUR/CZK pair has been still hovering just below the above mentioned level or around 4 % weaker since CNB governor’s rate-cut warning. Today, all the attention goes to US payrolls and eventually to the ISM report. Should the dollar react positively to today’s data we might eventually see more downward pressure on the koruna, which might successfully test the EUR/CZK resistance this time.

The Slovak koruna booked some profits against the neighboring Czech koruna. The unit registered approximately 0.8 percent but corrected later on. The whole move was from CZK/SKK 1.274 to CZK/SKK 1.268. Anyway, the EUR/SKK remained almost unchanged and the majority of the move was due to the Czech currency depreciation against the Euro. The state budget figures for the January – July period will be available today. However, the U.S. data should be in the centre stage.

Fixed income

The Polish bonds had a strong session on Thursday. Yields dropped by up to 10 bps across the curve to fresh two month lows in the wake of the bullish rally in core markets. All eyes are now set on the FinMin’s July inflation estimate to be released today (10:00 CET). We are looking for a fairly soft, flat reading of 4.6% Y/Y, with the deep seasonal drop in food prices weighing to the downside of the headline. The preliminary consensus stands at 4.7% Y/Y, with forecasts ranging from 4.6% Y/Y to 4.8% Y/Y, so if our expectations prove correct, we should see yields head further south. Such a reading would obviously put the current rate hike expectations to a test, and we see a decent chance that the market might initially overreact. Later in the session core markets will take on as the driver as the US payrolls report comes into focus.

Hungarian bonds did not move as the auction of the 3-year and 15-year bonds saw surprisingly strong demand and cut-off yields dropped below the secondary market levels. It seems that some investors see significant value in the HUF denominated fixed income assets and placed a big bet on this. As core market yields dropped significantly and the market is probably short of bonds due to the heavy demand yesterday, the negative impact from the currency could be limited for bonds. Any weakness could also be seen as an opportunity to buy papers as the medium-term fundamental outlook is positive due to disinflation and tight fiscal policy.

Czech bonds with slightly stronger trading volumes gained yesterday. No important domestic event was released; hence the Czech bonds followed the movements in core markets. Later on, the yields’ drop after U.S. statistics plays its role even on the Czech market. However, the yield decrease was decelerated by slightly weaker Czech currency and lost near to 5 bps at the end, which steepened the yield curve modestly. No fresh domestic events are expected today so the main impetus should come again from the core markets. However, a reaction to the key July payrolls may be weaker as the Czech bond markets close soon after U.S. data will be released.

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Published on  Fri, Aug 1 2008, 08:02 GMT