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Central European Daily

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Czech koruna hit by weak German Ifo

Wed, Aug 27 2008, 08:00 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech koruna hit by weak German Ifo
Fixed Income: NBP should stay on hold, but not finished yet

Currencies

The Czech koruna weakened quite significantly during yesterday session. We believe the sentiment on the Czech FX market has deteriorated mainly due to weaker German Ifo pointing to the possibility of weaker German demand for Czech exports. Even the reversal on the US dollar did not help much in the afternoon. Hence the pair moved up as far as 24.60 EUR/CZK.
Today we expect some consolidation as there are strong euro resistances near current levels. Nevertheless the sentiment towards the koruna probably won’t have to improve much necessarily. We expect a slow down in the domestic wage growth and possibly also stabilization on Eurodollar, which does not provide much support for the Czech currency.

On Tuesday, the price action in the Polish zloty was mostly driven by the negative trend in the region. In the morning, Polish retail sales came out at 14.30 Y/Y (close to expectations) while the unemployment rate declined to 9.4% from 9.6%. In theory, those data should have been slightly supportive for the zloty, but the market hardly showed any reaction. Global factors played a more important role. The poor German IFO release is not really good news for Polish exports and the geopolitical tensions after Russia’s decision to recognize the independence of South Ossetia and Abkhazia weighs on the sentiment in the region, too. So, the zloty lost further ground in afternoon trading nearing the EUR/PLN 3.33 area at the end of the session.

Today, the focus in Poland will be on the NBP interest rate decision. The Polish central bank is expected to keep rates unchanged 6.0%. Recent tentative signs of a slowdown in economic activity give the bank some leeway, but tight labour market conditions and the risk for second round effects from high wage growth will dominate the assessment of the rate setters. A ‘balanced’ hawkish statement as published after the previous meeting might reappear today. From a technical point of view, the EUR/PLN pair gradually comes closer to the key 3.3455 resistance area. From a fundamental point of view, we don’t see a strong reason for the zloty to weaken beyond this level. However, the geopolitical tensions on Georgia region are a wild-card for the region in general and for the zloty in particular.

Yesterday, the Hungarian forint weakened from 234 to 237 EUR/HUF, before closing the day at around the 235.50 level. The weak German IFO indicator and rising tensions between the West and Russia on the recognition of independence of Abkhazia and South Ossetia hurt most regional currencies, including the forint. Yesterday evening, the Hugarian Prime Minister Gyurcsany proposed a fiscal stimulus plan including tax cuts by as much as 1.2 trillion forint over the next four years to support growth, one day after the central bank kept its rates unchanged at 8.5%, but lowered its growth and inflation outlook. The PM however stressed that the plan won’t bring the convergence program in danger. The plan may nevertheless raise some doubts on the commitment of the government to meet the convergence program, which would be forint negative.

The Slovak koruna did not do much yesterday, oscillating close the level of EUR/SKK 30.30. This trading pattern should prevail on the market also today. The central bank left interest rates unchanged, as was widely expected. The key 2W repo stands at 4.25%, the same as the ECB rate. NBS governor Sramko said that cost factors remained the main inflation drivers in Slovakia. He added that decelerating retail sales suggests that domestic inflationary pressures are low. All in all, further steps of the NBS will go hand in hand with the ECB monetary conditions settings because of Slovakia’s euro zone entry in 2009.

Fixed income

The Czech bond market experienced another quiet trading session on Tuesday. As no fresh domestic data was released, the market mirrored worries that the slowing European economy may press the Czech National Bank to ease monetary policy again. At the end of the day the Czech yields decreased by 5 bps at the short end of the curve and the yield curve steepened.

Only quarterly Czech wages are released today, which should play a marginal role only. As no other domestic incentives are expected the bond market may follow eurozone sentiment. However, expectation that CNB could cut interest rates once more might keep the short end of the curve stronger.

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Published on  Wed, Aug 27 2008, 08:12 GMT