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Central European Daily

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NBS expected to stay on hold

Tue, Aug 26 2008, 07:43 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: US dollar remains the key driver of the regional sentiment
Fixed Income: NBS expected to stay on hold

Currencies

The Czech koruna went through a very calm session on Monday. The volumes were low as the big London banks were out of the market due to a UK Holiday. In the afternoon, the Czech currency slightly weakened following the euro weakening towards the US dollar.
Today we bet on sideways trading in a range below 24.50 EUR/CZK. Potential further gains of US dollar could trigger attempts to break back above that level. Nevertheless in case of low volumes that may be difficult anyway.

The Hungarian forint continued to move sideways in a tight range between roughly 233 and 235. The market kept the decision of the Central Bank to keep rates unchanged at 8.5% into stride without fuss. Governor Simor said the decision was more or less unanimous, though there was a proposal to cut rates by 25 basis points. The governor said that the macro figures were extraordinary volatile and the wage data noisy. The bank will keep rates unchanged until upward inflation risks have subsided. The Inflation Report sets a balanced inflation outlook around the 3% target for the medium-term as slowing growth will affect inflation pressures. The staff report worsened the growth outlook for 2009 to sub-3% real GDP expansion, while improved the core inflation path to 2.8% (was 3.7% in May) for 2009 and to 2.7% (was 3.0%) for 2010. Headline CPI forecasts changed minimal to 4.1% (from 4.2%) for 2009 and remained unchanged at 3% for 2010.
The assessment sounds also neutral as it says that a disinflation path has been established, but adds that risks still exist.

Next big thing could be if the inflation targets gains credibility, but this point may be months away as market will face political risk about the budget in September-October and inflation development will also have to underpin the expected disinflation path in next months, bond market may thus remain without clear trend in at least the next weeks..

The Slovak koruna traded along the same lines that were already set over the previous weeks. The currency pair stayed close to the level of EUR/SKK 30.30 as nothing meaningful happened. This trading pattern should also prevail on the market today, although the central bank meeting is scheduled. We expect NBS to leave its base rate unchanged at 4.25%. With the euro zone entry coming closer, the central bank will further stick to its wait and see approach and follow the ECB’s decision on the interest rates.

Fixed income

On Monday the Czech bonds gained slightly. Nevertheless the trading volumes were exceedingly thin due to U.K. bank holiday and continuing Czech holiday season. At the end of trading, Czech bond yields had decreased slightly by 1 bps along the whole yield curve.
No fresh data are scheduled for today. Hence the main impetus should come from eurozone markets. The return of British bankers from holidays may revive trading volumes.

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Published on  Tue, Aug 26 2008, 07:51 GMT