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Central European Daily

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IMF deal could help the stability of the HUF

Tue, Oct 28 2008, 08:51 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: IMF deal could help the stability of the HUF
Fixed Income: Czech markets closed for holiday

Currencies

The slightly weaker dollar and the rebound in Asian equity markets might be enough to reinstall short term optimism in the Polish FX market. The reduction of Poland’s external debt rating perspective by S&P (from positive to neutral) was completely ignored yesterday as if to confirm that the market is already extremely oversold. The zloty could edge higher against the euro today also because the government is expected to present the road map to the euro, along with the ambitious entry date of Jan 1 2012. We remain cautious in the longer term though, as liquidity is still far from normal which continues to exaggerate price volatility.

The Hungarian forint welcomed the soon-to-be-announced IMF package, which could be a safety net behind the currency. There is no official announcement yet, but press leaked out some info about the package. Since 2003, the IMF has advised the government several times on taking back at least part of the social spending spree that took place in 2002, like the 13th month pension and wage increase for public sector workers and press reports are highlighting these possibilities worth about Ft300bn in gross or Ft200-250bn in net terms. If accepted, it will be a huge leap forward as Hungary will cut the budget deficit well below 3% of GDP in 2009, although growth could be sacrificed to zero or negative. This means that the structural budget deficit could be lower around 1-2%. The market has welcomed the idea so far and EUR/HUF appreciated to above 270 by the end of the day, although there is a risk that the minority government will have difficulties in gaining majority in the Parliament. Small opposition party MDF has already said that it could support the budget proposal as the country needs it, but this was stated before the new spending cuts. Parties will meet today and discuss the initiative, so we may see the real political support today, though the alternative scenario of a severe currency crisis is a worse option.

The Slovak koruna held relatively stable yesterday, oscillating close to the level of EUR/SKK 30.50. There were no important data or events on the schedule. Today, the central bank announces its monthly interest-rate decision. We don’t exclude that the NBS will cut rates in a reaction to the ECB’s latest rate cut by 50 bps. If this scenario is fulfilled, the key rates of the NBS and ECB will be brought to the same level. The subsequent reaction of the market should be only modest.

Fixed income

Polish bonds should follow the zloty higher in prices today in an extension to the upmove which got off to jump start in the wake of the massive near-panic sell off last week. The MPC convenes today for its regular monthly policy meeting. The decision tomorrow can only be “no change”, so the market will scrutinize the communiqué and rate setters’ comments after the meeting for indication of whether (and when) the MPC could start cutting rates. However, for fundamentals to start to really matter liquidity would have to reappear in markets.

Hungarian bonds weakened further as foreign investors are demanding higher risk premia from HUF assets and the market has started to accommodate to this after the central bank’s measures helped the turnover to increase. This process may last a bit longer, although the currency’s recovery could help and we would wait with buying bonds until there are signs about the recovery of foreign demand.

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Published on  Tue, Oct 28 2008, 08:57 GMT