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Central European Daily

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Core market gains send Polish and Czech yields lower

Fri, Sep 5 2008, 07:36 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech foreign trade boost for the koruna was short lived
Fixed Income: Core market gains send Polish and Czech yields lower

Currencies

The slump in the euro following the ECB press conference rally had a devastating effect on the Polish zloty yesterday afternoon. EUR/PLN edged past the 3.375 resistance level with no difficulty whatsoever as the flight from the region continued only to slide well into the 3.40-3.41 area overnight. Markets remain worried that the ECB might be underestimating risks for euro zone growth and seem skeptical on the upward revision of the inflation estimates given the recent calming in commodity prices, which puts the zloty in a difficult position. On the one hand rate hike expectations should continue to support the unit (at least relative to regional peers), while on the other, concerns regarding euro zone growth and the continued weakening of the euro are likely to set the tone in markets for the time being. On balance the outlook for the zloty does not look particularly bright. We would not be surprised to see the pair head higher today, especially if the US payrolls were to surprise to the upside later today, pulling the euro down deeper.

Although the Czech currency managed to gain after much better-than-expected July’s foreign trade figures (surplus reached CZK 7bn – the best result in this month ever), these gains appeared short-lived and the koruna closed the session actually lower. The reason for currency easing was once again an increase in global risk aversion, which pushed other regional currencies lower and the koruna these days sticks to this trend. Hence, even though the EUR/CZK slipped in the morning to the 24.7 level, it closed the session just below the 24.90 resistance.

Today, all attention will go to the August US payrolls report, which can have once again a negative impact on the whole region. On the other hand, if risk aversion increases further significantly, the koruna at some point might decouple form its regional peers and start to play its save-haven position.

The Hungarian forint was hurt significantly by the ECB decision and the pair sunk to 242.00 by the end of the day, which means more than 1% move day-on-day. The deadlocked political situation is also not helping the currency. Free Democrats want to replace the PM, while Socialists stand clearly behind him. Socialists said yesterday that they will submit new tax proposals at the end of September, which opens up the possibility of negotiation on a new tax program with the liberals, however this looks to be difficult after liberal leader Mr Fodor said that low credibility of the government does not make any program plausible and this requires a new government, as well. Not a positive outlook thus for the HUF overall.

The Slovak koruna was little changed yesterday, moving a touch below its longestablished level of EUR/SKK 30.30, but this morning, it oscillates close to 30.28. We do not expect any big changes ahead of the weekend and the koruna will further live its own life. For next week, plenty of macro data are on the schedule, but non of these will have an impact on trading.

Fixed income

The Czech bonds gained and the volumes were above average during yesterday’s session. The main driver was the sell-off on the global equity markets and the subsequent gains of the German bund. Better than expected foreign trade figures were more or less ignored. The yield curve slightly flattened as the gains on the short end were limited by the afternoon weakness of the Czech koruna.
There are no domestic market movers scheduled for today. Hence the bonds may eye the sentiment on the core markets after the US payrolls release.

Polish bonds extended recent gains in the wake of the drop in core market yields. The bond curve was down by 4-6 bps throughout the day with the 10Y benchmark testing bids in the 6.0% area at the end of the session. Core markets will remain the driving force for Polish bonds in the days to come as the next relevant local factor on the domestic agenda (CPI on the 15th.) is still quite some time away. Interestingly, the weakening zloty has had no adverse effects on the market sentiment so far and apart from the risk that in case of a deeper correction it might eventually start to weigh, we see no reason for Polish bonds to go against the tide at least until the data calendar heats up midway through the month.

Hungarian bonds were surprisingly resilient to the weaker currency as lower core market yields allowed for wider spreads without higher local yields. The 5y5y swap spread has widened to 220bp, almost 20bp higher as euro zone yields lowered, while swap and bond curves shifted up only slightly around 5bps. Although the current levels do not seem expensive relative to the fundamental outlook, but the momentum is still for further losses, so it may worth to wait for some consolidation before entering into receiver/long bond positions.

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Published on  Fri, Sep 5 2008, 07:44 GMT