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Central European Daily

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Czech bonds ignore macro−data

Thu, Sep 11 2008, 07:48 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Polish PM wants to adopt the euro in 2011
Fixed Income: Czech bonds ignore macro-data

Currencies

Polish PM Donald Tusk put markets in a state of shock yesterday by declaring that the government aspires to entering the Euro zone in 2011. This is a major surprise for several reasons. First of all up till now various officials, including the Finance Minister and his staff, had consequently avoided giving any specific details on the planned time-frame for EMU entry. Several weeks ago the FinMin had even suggested that markets would have to calm down in the wake of the ongoing severe turbulence before ERM entry was possible.

Meanwhile the PM’s declaration comes just after the zloty had depreciated by nearly 10% in volatile, speculative price action, as if to confirm that the previous cautiousness was indeed warranted. So, the message is somewhat confusing in this respect. Secondly, while technically it would be possible for the zloty to enter the ERM-2 next year (H2 seems the earliest possible date) so that the zloty could be replaced by the euro two years later, it would require the decision to be made almost immediately. Meanwhile the government has not even started preparatory talks with the Polish Central Bank ahead of the negotiations with the ECB and the European Commission. All this takes time and considerable effort. Legal issues may pose a problem as well possibly extending the time-frame even further, since changes in the constitution are needed before entry is possible. These would require the unlikely support of the opposition in parliament. As such we treat the PM’s declaration with caution. EMU entry in H2 2011 is possible, but the chances are very high that the commitment will be broken. In any case Tusk has put the bar up high, and given the market’s high hopes any delay in entry would be devastating for market confidence. At the same time it seems that the PM will find it extremely difficult, if not impossible, to back out from yesterday’s declaration. Given the vast uncertainty mentioned above the zloty’s knee-jerk strengthening in reaction to the news (from EUR/PLN 3.47 early yesterday to EUR/PLN 3.38 this morning) should be a oneoff move. Technically a break below 3.40 opens the road to further strengthening, but this prospect will depend, among other things, on the reaction from monetary policy.

The Czech koruna did not react on the final GDP figure, which showed only the mild upward revision (0.1%) compared to preliminary data. Stronger impulse came in the afternoon from Poland. The announcement of Polish Prime Minister Donald Tusk that he wants to adopt the common currency in 2011 boosted the whole region. The Czech koruna subsequently gained more than 1% and ended session at 24.55 EUR/CZK.

Today, no domestic events are scheduled, thus the koruna should again rely much on the regional sentiment. We believe that yesterday’s positive sentiment might last for a while, which could help the Czech currency to keep its current levels or even slightly firm.

The Hungarian forint rode the roller-coaster again yesterday, when global factors clashed with regional ones leading to more than 1% intra-day move. The first jump came with the Polish announcement about introducing the euro in 2011 and the pair appreciated to 238.50 from 240.50. Later however global rebalancing and dollar strengthening resumed the weakening trend that we have seen so far this week and the currency corrected back to 240.40. It feels that Asian and US investors are mainly behind portfolio rebalancing as most of the weakening took place in the afternoon and overnight, suggesting that we may see this ongoing as long as the dollar strengthens.

The Slovak koruna depreciated slightly in the afternoon trading from EUR/SKK 30.25 to EUR/SKK 30.29. The CPI inflation came out surprisingly high at 5%, which is two-year maximum. Today, the trade balance is on the agenda and we are more skeptical after the weak industrial production released earlier this week.

Fixed income

Polish bonds soared lower in yields by up to 20 bps for longer maturities on the PM’s declaration on the aspiration to enter the EMU in 2011. While we are hardly surprised by the convergence play, we would be cautious to bet on a new up-leg for Polish bonds to start just yet. The MPC will probably show the direction for markets in the near term. In this respect we find it very likely that the hawks and maybe also the moderates will almost surely argue for more monetary tightening in the near term so as to get inflation down below the Maastricht threshold in 2009. Obviously this would also open the road to quicker easing next year and could lead to an increase in the inversion of the curve.

Czech bonds traded yesterday relatively calm. Yields fell mainly at the middle segment of the yield curve and mildly so at the long end. The Czech crown again had no impact on the yield moves, as bonds with short maturities weakened in spite of the strengthening of the Czech currency. Trading volumes were little above the average. Today we do not expect the any major domestic macro - data; thus the Czech bonds might find some inspiration in core European markets.

The Hungarian bonds followed the currency again and yields dropped about 10bps first, while the correction later have not yet affected bonds as it took place mainly after onshore market closed at 1700CET.

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Published on  Thu, Sep 11 2008, 07:58 GMT