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Central European Daily

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CE bond markets await the ECB meeting

Thu, Oct 2 2008, 08:25 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Higher risk aversion and stronger USD weigh on the zloty
Fixed Income: CE bond markets await the ECB meeting

Currencies

The Czech koruna hovered on Wednesday in relatively tight range between 24.5- 24.6 EUR/CZK. In the afternoon the Czech currency shortly broke through the barrier 24.5 against the euro but till the end of the session it returned back and ended the session at 24.55 EUR/CZK.

There are no Czech data scheduled for today and the koruna will find inspiration on global markets. Despite the approval of the US bailout plan by the Senate, nervousness in the market most probably will persist. The most interesting event for the Czech koruna will be ECB meeting, especially if it hits the EUR/USD market. Should the dollar be able to extend it gains after the meeting the koruna could suffer some losses.

The Hungarian forint stagnated around 242.00 before the US senate accepted the rescue package, but the reaction of equity markets so far questions whether a relief rally could come or not. Instead, investors seem to get concerned about the global slowdown, which could keep portfolio rebalancing and risk aversion intact for now.

The Polish zloty traded higher against the euro yesterday morning, only to retreat to the EUR/PLN 3.40 area later in the session. The approval of the bailout plan by the Senate by a vast majority of votes seems to have received a rather cool welcome, and while 3.40-3.41 should provide ample resistance for the EUR/PLN pair, we could see the zloty come under pressure again today.

The Slovak koruna oscillated in a tight range around EUR/SKK 30.30 lacking any impulse. Today the Slovak economic calendar is empty, but the ECB meeting and its subsequent comments, which could suggest the further path of interest rates, might be interesting for Slovak markets.

Fixed income

Polish bonds inched lower in yields across the curve yesterday as the market continued to speculate whether the MPC would go against the grain and hike rates given the weak sentiment in financial markets and recessionary signals coming from the European economy. The September PMI suggests that Polish manufacturing continued to linger below 50 pts. For the fifth month running (44.9 pts.), with not only current output but also both foreign and domestic orders sub-indices putting in a weak performance. As leading indicators, these point to a further weakening in industrial activity and, eventually, economic growth. At the same time headline inflation is set to drop substantially in the months to come due to the high base last year, which will limit the possibility of tightening beyond October. According to FinMin estimates the Septebmer CPI will come in at 4.4% y/y (from 4.8% y/y in August), which is roughly in-line with the consensus, and 0.2 pp above our preliminary estimate. Nevertheless we stick to our standing baseline scenario, that the Council will hike for the last time this month in a bid to ensure the fulfillment of the inflation criterion in 2010.

The Hungarian bonds did not move much on the day as there was news before the US announcement. Prolonged risk aversion may refrain them from recovering, despite yields are close to record high levels.

Czech government bonds yesterday firmed, though trading volumes were rather negligible. Yields felt along the whole yield curve, with the biggest movement at short end, where the yield of 2 year government bond felt by 4 basis points.

Today, the focus will be on ECB. Definitely any dovish signals by Mr. Trichet might help Czech bonds to extend yesterday’s gains. Furthermore, also nervousness at global markets before Friday’s House of Representatives vote regarding the bank bailout plan should support Czech bonds as well.

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Published on  Thu, Oct 2 2008, 08:34 GMT