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Central European Daily

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Hungarian bonds decline in step with the forint

Wed, Oct 8 2008, 08:12 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CE currencies continue to feel the heat from global market stress
Fixed Income: Hungarian bonds decline in step with the forint.

Currencies

The Polish zloty traded higher against the euro in choppy trade on Tuesday. At the end of the session the weakening of the greenback coupled with early signs of resilience from the US equity market coincided with reassuring words from Jacek Rostowski. The Finance Minster bolstered confidence by saying that the ongoing financial market turmoil would not hurt Poland’s Eurozone entry aspirations. The EUR/PLN shot lower from the 3.45 range to 3.41 in an instant as a result, before losing some ground in the run up to the closing (midway in the current 3.40-3.45 range).
The catastrophic performance by equities in the US and Asia prove best that the fear factor continues to dominate markets. This means that the zloty will have yet another tough session today. 3.4750 should provide some resistance although the EUR/PLN is just inches away from testing bids in the 3.4850-3.50 area, which if broken would be an important psychological and technical signal.

On Tuesday the Czech koruna firmed again. Improving sentiment prevailed in the whole region and the gains of the koruna were significant. The Czech currency moved below the barrier at 24.50 EUR/CZK, but closed at 24.60 EUR/CZK.
Today, the September inflation data will be published, but its impact on FX trading will be according to our view negligible. The koruna seems to be dependent on global market sentiment and is considered mostly as a safe haven. We believe that yesterday’s Mr. Bernanke’s signals about a rate cut in the U.S. should further support the Czech currency.

The Hungarian forint has been tracking the general emerging market sentiment, some consolidation occurred during the day and the forint ‘recovered’ to below EUR 250, but overnight the drop of the US equity markets and Latin American currencies saw it back to 251-252. There is not much reason to stay optimistic for the short-term, countries with external debt saw the biggest pressure on their currencies and despite Hungary has stable flow situation (Current account gap etc.), its gross external debt stands at 100% of GDP, while net debt reached 40% of GDP, so refinancing risk does exists. A London bank also said yesterday that Hungary should catch-up to the higher CD spread levels of Bulgaria and Romania, which could mean that market may start speculating about the risk of default. This does not seem realistic at all now, but may intensify the contagion effect from other countries.

Fixed income

Polish bonds held flat in surprisingly calm trading session on Tuesday. We expect the market will continue to consolidate today ahead of the 10Y benchmark tender (PLN 2.5 bn on offer). The weakening zloty and the drop in yields in recent weeks suggest that the auction is unlikely to be a spectacular success, even though primary supply has been scarce in recent months. This could push the long end of the curve higher in yields throughout the session. Meanwhile the short end of the curve is likely to stay under downward pressure ahead of the barrage of data next month as the market speculates on the quickly fading prospect of a rate hike this month.

Czech bond yields went down only slightly yesterday. While the long end fell by 4bps, short-term yields fell only by 2bps. The spread between bond yields and IRS widened therefore again. Today the September inflation data will be published and a lower than expected figure can support rate cut expectation and lower yields. The inflation (est. 6.5% y/y) would be 0.5 percentage point lower than the central bank forecasted.

Hungarian bonds continue to suffer in the current situation and the 3-year yield traded tad above the 10.00% threshold yesterday, which contains a historic high spread to the euro zone, but nobody showed any willingness to buy.

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Published on  Wed, Oct 8 2008, 08:20 GMT