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Central European Daily

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CNB governor expects the inflation to fall to 3−3.5% in Q1 2009

Fri, Aug 29 2008, 07:56 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Fitch warning and stronger US dollar weighs on Central Europe
Fixed Income: CNB governor expects the inflation to fall to 3-3.5% in Q1 2009

Currencies

The Polish zloty continued to weaken on Thursday, in line with regional peers, as the regional sentiment deteriorates. Importantly, the EUR/PLN pair broke above 3.3456 level, the previous high, deteriorating the technical picture further. There were no eco data published, but the government announced good budget results for the first 8 months of the year. A number of the hawkish ledger inside the MPC came out in favour of one more rate hike, but couldn’t impact the market.

The Hungarian forint dropped almost 1% to EUR/HUF 239 overnight from EUR/HUF 237 level in the morning, as investors scaled back positions on emerging markets. Better US growth outlook contributed to the mounting risk aversion on these markets as the high yielding, low risk asset class of many emerging market currencies, including the HUF, lost attractiveness. A weakening trend has now been clearly established, and the next key level of EUR/HUF 240 could be tested today, followed by 242, if broken.
Domestic news is not really important, but otherwise there is not much to talk about apart from the risk of political noise due to the upcoming discussion of the 2009 budget in the Parliament.

The Czech koruna stayed under pressure on Thursday and the pair hit 24.755 EUR/CZK during the day. The negative sentiment was partly caused by growth downgrades by IMF and Fitch during the week. Beside that, also moderate gains of US dollar could have played the role yesterday. Today the US dollar and the hurricane story could be the main drivers of the Czech koruna. Nevertheless from technical point of view we do not see much space for an improvement in sentiment and we rather bet on further losses in the short term. The morning cautious comments of the Central Bank governor Zdenek Tuma should have only limited impact on trading.

Fixed income

Hungarian bonds weakened with the currency as usual, while demand on the 10- year bond auction exceeded 100bn, more than twice the offered 50bn amount. The outlook here is similar to the currency market, hence not very positive for the next 2- months, but the current period could give a good entry point later as fundamentals are still improving.

Czech bonds experienced a vivid trading session yesterday. Hence no fresh domestic data were released and therefore Czech papers followed their euro zone counterparts. Also stock market gains supported bond sales. At the end, the Czech yield curve gained up to 7 bps and the yield curve flattened.

No fresh domestic news will be released today. CNB governor Zdenek Tuma said that although the recent decision to lower interest rates was unanimous, many of the board members were very much on the edge and it could have easily gone the other way. He also suggested that the deciding factors were the sharp jump in the crown and a bigger-than-expected slowdown on the local and global markets. The main fear, he said, was that the strong crown could cause inflation to fall below the central bank’s target. Now, he said, the CNB expects inflation in Q1 2009 of 3.0-3.5%. Nevertheless his comments should have only limited impact on trading. Yesterday’s decline and current low prices might increase interest in bonds. Moreover, expected lower euro zone inflation could also support bond prices.

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Published on  Fri, Aug 29 2008, 08:34 GMT