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Central European Daily

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Hungarian bonds' sell off goes on

Mon, Oct 13 2008, 07:58 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech foreign trade improvement fails to support the koruna
Fixed Income: Hungarian bonds’ sell off goes on

Currencies

The Polish zloty made a successful recovery on Friday from the massive losses sustained late last week as local exporters kicked in to profit on the panic-like sell-off which brought the EUR/PLN to fresh year-to-date highs early in the session. The EUR/PLN is now traded at 3.54, compared with 3.42 on Thursday morning and 3.65 on Friday. Despite the massive drop in equities ahead of the weekend, the rebound in the HUF seems promising and the slightly weaker dollar suggest general sentiment seems to have improved somewhat. This could help the zloty reverse some more of the most recent losses. Volatility is however, here to stay, unless at least the smallest bit of confidence and trust returns to the struggling money markets this week. The dollar and the regional sentiment will be eyed closely for inspiration.

The Czech koruna weakened above the level 25 EUR/CZK on Friday morning. Later it firmed slightly and closed the day at 24.87 EUR/CZK. Today the Czech koruna will hardly find any direction and we expect it will continue to fluctuate around the 25 level.

The Hungarian forint fell to 272 amid the panic on Friday, but a swift reaction from the government and the central bank helped the market to calm down later on and the currency recovered to 260 by closing. Over the weekend it has strengthened further to around 257, suggesting that we are probably over the worst and more stable trading could take place today. Authorities announced additional budget tightening for 2009 and a lower budget deficit projection for 2008, while the central bank will hold 1-day FX swap auctions to help banks’ foreign currency liquidity. The central bank also offered OTP to guarantee its interbank loans, but OTP refused this option. Likely OTP will have no problem in handling the situation as it may have ample liquidity from retail deposits and from earlier sale of assets (Garancia insurance company) which proceeds arrived in euro. Given the weak level of the HUF some may consider buying the HUF as it may recover to around 245-250 soon.

Similar to most of the CE currencies, the Slovak koruna was also hit by a selling wave on Friday. It eased to EUR/SKK 30.80 and then oscillated below this level. Mainly foreign banks are closing their positions in order to improve their euro liquidity. This week is relatively thin in term of data releases. Only on Wednesday, HICP is on the schedule, but without any real market impact.

Fixed income

Polish bonds headed higher in yields late last week as the PLN weakness spilled over to the FI market. The move was strongest for longer maturities and the resteepening of the curve was also fueled by rising expectations that the NBP would eventually have to cut rates to aide the economy. Even though fundamentals have been less relevant for markets in these troubled times, we think the barrage of data this week (starting with the CPI data tomorrow and ending with the activity numbers on Friday) will be eyed closely. We are on the outlook for soft readings in both cases, which points to an even steeper curve this week.

The trading on the Czech bond market froze on Friday. The market is more and more influenced by the negative sentiment coming from Western Europe and the liquidity on the market remained weak. The CNB and the banks will try to find a way to restore the trading on the bond market. Therefore any indication of bond yields direction is impossible today.

The Hungarian bond market has been frozen as primary dealers accumulated major losses and did not give quotes, which could also mean that yields may not rose further from the current 10-11% level. These are outstanding opportunities for investors as the government has been accelerating on the fiscal consolidation front, which could allow yields to fall sharply over the next months.

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Published on  Mon, Oct 13 2008, 08:05 GMT