• Home ::
• Fundamental ::
• Market View ::
• Central European Daily

• Send
• Print
• Add To
• Rss

Central European Daily

d08a93cb-a749-437c-a034-28871120ed43

0

0

Czech money market feels relief

Tue, Oct 14 2008, 07:58 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CEE currencies gain on lower risk aversion and weaker US dollar
Fixed Income: Czech money market feels relief

Currencies

The Hungarian forint switched onto stabilization mode on Monday after the pair surged to as high as 251-252 at the beginning. The positive international sentiment could help it again today.

However, there is one concern that could remain with us for the coming months even if the global crisis recedes. Two large retail banks announced that they will stop or tighten lending in foreign currencies as volatility made the product too risky for the customers. If more banks announce this, the HUF may get less capital inflow from the process as FX borrowing generated significant portfolio financing behind, in excess of €4.0bn per year or almost equal to the current account gap. This could mean that we may see a country-specific currency weakening the next time, albeit this may be months away and there is a chance that other type of inflow replaces it.

The Slovak koruna erased part of its previous losses yesterday and returned to the level of EUR/SKK 30.60. This move was in line with the improved sentiment in the region. Today, there are no important data or events on the schedule. The koruna will probably follow the same trading pattern that was seen in previous weeks – sideways trading without significant moves.

The Polish zloty inched marginally higher against the euro in a surprisingly calm trading session on Monday. The improvement in sentiment was modest given the scale of the upswing in equities though, and we could see the PLN gain momentum today ahead of the CPI release later in the session, particularly given the slightly weaker dollar. The inflation data are set to be a PLN negative (more in FI part), but luckily the FX market is unlikely to pay much attention to fundamentals in the current circumstances.

On Monday the Czech koruna profited from improved sentiment on global markets after the announcement of European officials to recapitalize their banking system. Also central bankers and governments of some central European countries discussed measures to help their banking system and even though Czech Finance Ministry said it was not planning any rescue package, the koruna was able to benefit from the improved mood. The Czech currency rallied at the beginning of the session and tested the barrier at 24.5 EUR/CZK. Nevertheless till the end of the session it wiped off some of its earlier gains and ended the session at 24.8 EUR/CZK.
Today the focus again will be at global market financial crisis. We believe that weaker dollar should help the koruna to extend its gains. On the other hand in spite of yesterday’s optimism markets will be cautious thus we believe that potential gains of the Czech koruna will be limited.

Fixed income

The Hungarian bond market has also started to stabilize as investors were returning and trading volume picked up after last week’s meltdown. Yields are still high and the bond market is normally the last to recover as auctions’ supply keep slowing down the process. Extreme levels may attract lot of new interest if things keep on normalizing in the coming days, but much depends on the currency so it may worth to keep an eye on it, as well.

Polish bonds were little changed in extremely tight liquidity conditions on Monday. Right from the start of the session all eyes were on the NBP, which announced that it would provide measures to foster trust and liquidity in the money market. The details were not revealed, but one might suppose that an array of tools could be used, including repo tenders, accepting a wider class of assets as collateral in other lending instruments from the central bank and potentially, inter bank loan guarantees. The NBP stressed that the plan was a precautionary measure and not a rescue operation, since the Polish banking system was in sound condition despite the evident strains in the money market. The announcement comes at the right time though we think, and might indeed help bolster confidence in due time. Later in the day the MPC held its second unscheduled meeting in a week, and despite speculation that it might lower the Lombard or deposit rate to provide banks with cheaper funding or encourage inter bank lending, it held rates flat. Instead, the MPC added currency swaps to its array of policy instruments, to be able to supply FX liquidity to banks, should they need it. Today the market will be focused on two issues – the confidence-bolstering measures to be announced by the NBP around noon, and the September CPI at 14:00 CET. Regarding the latter the FinMin estimates that the September 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 which stands at 4.2% y/y. We are looking for a much softer rise in food prices than a year ago (high base) and falling fuel prices will add the disinflationary effect. This said we should see the curve steepen further today.

The Czech bond market stayed once again more or less frozen. Nevertheless it is worth mentioning that the Czech money market felt some relief similar to that on the global markets.

Today the Czech government should pass the increase in guarantees for the bank deposits. This should be widely ignored by the market as most of the attention should be on further risk aversion development on the global markets.

• Download Full Central European Daily

Published on  Tue, Oct 14 2008, 10:30 GMT