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Central European Daily

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CEE currencies eye ECB

Thu, Sep 4 2008, 07:39 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CEE currencies eye ECB
Fixed Income: Weak outcome of the Czech 10-year auction

Currencies

The Hungarian forint seems to have passed the key 239.00 level overnight on the fifth attempt in a week as sentiment turned negative on emerging markets and domestic politics does not seem to be calming anytime soon. Cabinet minister Mr Peter Kiss said today on a press conference that "replacing the PM is not on the table, yet”. Whether "yet" is the message of this statement or not, is the main question in this debate as his remark that "it would be odd to replace the PM and carry out the same program" can be understood twofold. It seems to be defending the PM, but also opening up the possibility that a different program from the Socialists could bring a new PM. The fact that Mr Kiss is saying these words suggests that he could be the most likely candidate for the position. Not a technocrat government scenario, but a new agreement between SzDSz and MSzP, either in the form of a new coalition or keeping the current state with ad hoc support from the liberals. How to keep the budget deficit on track and cut taxes? Liberals want tax reductions, while Socialists do not want to cut expenditures, thus agreement does not seem viable now. Persistent uncertainty will be bad news for markets, so we may eye levels above the 240.00.

The Polish zloty had a tough session on Wednesday as the EUR/PLN pair inched higher into the 3.37 range in early trade buoyed by the strengthening dollar. The zloty returned below EUR/PLN 3.36 for a brief while just before the closing as the greenback retreated into the EUR/USD 1.44-1.45, only to come under renewed pressure in illiquid offshore trading. Currently the pair is testing bids at 3.3750, where some resistance should be seen. The regional sentiment remains shaky though with both CE4 and emerging markets bearing the brunt of the drop in oil prices and the dollar upsurge, which is why we stick to our view that the short term risks for the EUR/PLN remain to the upside. At the same time given that rate hike expectations are still very much alive, we expect the PLN will have the capability to outperform its regional peers in the near term.

The Czech koruna stayed in a rather narrow range below 24.90 EUR/CZK on Wednesday, which was partly due to the technical exhaustion of the weakening trend and partly due to the lack of important news. Even further gains of US dollar were ignored. Today, we believe that foreign trade may confirm resilience of the Czech exporters in the current deteriorating environment. That could partly offset any attempts to weaken the koruna even in the case of further dollar strengthening.

The Slovak koruna stayed unchanged yesterday close to its longer established level of EUR/SKK 30.30. Looking at the data, Q2 GDP growth was confirmed at 7.6%. The economy was again driven by domestic demand, but household consumption was not the most important driver as in Q1. Also investments contributed significantly, which is positive news for the future development. Disappointment came from net exports making only marginal contributions to growth. We cannot exclude that lower than expected exports could have its reason in lower euro zone demand. For the year as a whole, GDP growth should reach 7.5% Y/Y.

Fixed income

Hungarian bonds rose further with the currency and 10-year yield reached levels a tad above 8.00%, which we have not seen for 3-months. The market is naturally mirroring the currency, so no quick turnaround is expected here, but probably more losses will come.

Polish bonds soared lower in yields across the curve in the run up to the 5Y benchmark tender yesterday, before giving back some of the gains in the second half of the session. The auction went well, with PLN 2.64 bn worth of bonds sold at the primary and top-up tenders and roughly PLN 10.7 bn of bids. However, prices were less impressive though in the light of the spectacular demand, as the average yield came in close to the secondary market level.
Today the ECB rate decision will be the eye-catcher. Since we expect a rather hawkish outcome we should see the potential for further gains capped for now, particularly if core European markets sell off following the press conference. The barrage of US data will come into focus as well and might set the tone ahead of the US payrolls tomorrow..

On Wednesday, Czech bonds profited from falling stocks. Yields fell slowly along the whole curve, but most at the short and long end (2-3 bps.), while the drop in the middle was rather modest. Bonds were not hit by the 4%/2017 bond auction which was not very successful. The Czech Finance Ministry retained 3.3 bn CZK worth of the bond from the overall amount of 8 bn. CZK with the average yield of 4.560 %. Today, the Czech economic calendar is empty, thus the focus will be on ECB meeting and Czech bonds will probably follow its European counterparts.

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Published on  Thu, Sep 4 2008, 07:50 GMT