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Central European Daily

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CEE currencies cede ground as USD gains

Fri, Oct 3 2008, 08:13 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CEE currencies cede ground as USD gains
Fixed Income: Hungarian bonds lose with the Forint, Czech bonds gain

Currencies

The Polish zloty traded flat in a tight range between 3.40-3.41 throughout most of the session on Thursday before heading higher in a move inspired by the strengthening dollar. Earlier the pair ignored the handful of dovish comments by key rate setter Jan Czekaj (more in FI part) and the PLN once again proved virtually immune to contagion from soft performance in equity markets. The bailout vote in the US House will draw ample attention ahead of the weekend, but we doubt whether this will be a major market mover for the zloty unless the sharp swings in the dollar continue. The market might in turn be more responsive to the US payrolls and ISM due out today as well.

The Hungarian forint finally broke the 242-244 range on the weak side and closed the day at 245.00, a level seen only once since June. Global pressures seem to have reached the EMEA region by now. These have been counterbalanced by positive news about the Polish euro adoption and by the better Hungarian budget situation and inflation outlook, but as markets have priced this in, CEE currencies, including the HUF could join the general emerging market weakening. A further deterioration in global investor sentiment could potentially lead to a significant weakening of the forint. Many emerging currencies in Asia and Latin America lost more than 10% in the last two months, while this region saw only a mild correction.

The Czech koruna was under influence of very weak regional sentiment and lost more than one percent closing the session near 24.80 EUR/CZK. The main trigger of the move was the ECB press conference and the dovish comments made by the President Trichet. The following losses of euro and gains of USD deteriorated the overall sentiment in the Central Europe. Today we put the risk for the Czech koruna to stay under pressure and try to break above 24.83 EUR/CZK. In case of success we may see it testing 25.00 in the near future.

The Slovak koruna came under pressure yesterday moving to EUR/SKK 30.37 from the opening level of 30.33 on closing positions by foreign investors. The interesting message came from yesterday’s ECB meeting where Trichet signaled the possibility to cut rates as early as next month. This would suggest that Slovak central bank will ease its monetary policy in the same month. Today, the eco calendar contains August retail sales, but these are traditionally not a market mover.

Fixed income

Polish bonds headed higher in prices following surprising dovish comments from the key rate setter Jan Czekaj, who suggested that quick rate hikes were not necessary and added that he was considering whether further tightening was warranted at all. On paper this puts the prospect of an October hike in serious question. Under the assumption that the NBP president Slawomir Skrzypek would remain in the dovish camp both Czekaj and Slawinski would have to vote in favor for the motion to garner the needed majority. We must admit that Czekaj has been on the dovish side of the moderate fraction within the MPC, which makes his change in tack a bit less surprising. However, at the same time, Sławiński, and more importantly Skrzypek, have both recently indicated that if the government confirms its ambitious aspiration to enter the EMU in 2012, this would require an appropriate reaction from the MPC (meaning either a hike in October or flat rates for longer). This means Skrzypek has now become the median voter. What is more, he in particularly will bear huge responsibility for fulfilling the inflation criterion as the head of the NBP. Hence for the time being we stick to our view that rates will rise for the last time later this month, even though the growth outlook has deteriorated further and inflation is already on the way down from cyclical highs. At the same time we must acknowledge that in the end if the MPC has any doubt as to the government’s intentions regarding the euro, it may very well decide to end the tightening cycle already at this point.

Hungarian bonds lost roughly 10bps with the weaker currency and the interest rate swap curve also rose, which was not the case before. The bond market weakening has taken place via widening ASW spreads before, but probably these have reached levels justified by the current market conditions and further weakness could mean a parallel shift of the IRS and bond market curves.

The continuing uncertainty on the core markets as well as dovish comments after the ECB meeting supported the Czech bonds yesterday. The yield curve went down by approximately 10bps but the money market rates remained still too high, especially compared to low FRA influenced by rate cuts expectation. Today the yields can fall slightly again due to the continuing uncertainty ahead the House of Representatives voting and expected weak figures from the U.S. labour market.

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Published on  Fri, Oct 3 2008, 08:18 GMT