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Central European Daily

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Situation on the Czech money market is getting tough

Fri, Oct 31 2008, 08:53 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech governor sceptical on euro adoption
Fixed Income: Situation on the Czech money market is getting tough

Currencies

Like its regional peers, the Polish zloty gave back some of this week’s impressive gains on Thursday in a move inspired by the strengthening dollar. The impression is that while the first heat wave of the current financial market crisis is behind us, extreme volatility is here to stay at least until risk appetite and liquidity conditions improve markedly in global markets. Nevertheless, we remain confident about the medium term outlook for the zloty – a sustainable drop to of the EUR/PLN to 3.50 or even below is our baseline scenario once the crisis starts to fade. In the meantime however, we could see the zloty retest lows even in the EUR/PLN 3.70-3.80 area if for some reason risk aversion returns to markets. As such we would treat the potential renewed weakness as a zloty buying opportunity.

The Hungarian forint had a volatile day as profit taking kicked in. The pair opened at a new high of 252-253, but quickly reversed towards 255 in the morning and later to 264 in the afternoon as profit taking after a more than 10% rally accelerated the weakening trend triggered by mixed signals about the Polish euro adoption plan. Relatively good performance on global equities overnight however helped the forint to regain strength by this morning and it seems to be recovering back to above the key 260 level. Overall, the currency has stayed in a recovery mode so far and although volatility could remain, extreme high yield levels with a bit calmer international backdrop could keep it in the 255-260 range.

The Czech koruna eased yesterday as one big foreign market player took an advice of it own research to go EUR/CZK long seriously and bought euros on the market. Hence, the EUR/CZK gradually moved north, while it stopped at the 24.60 resistance.
Interestingly, CNB Governor Zdeněk Tůma joined the euro-sceptic position of the government as he told the Senate that today’s rough waters are a signal that no decision should be made now on adopting the euro and moving quickly to the ERM2. Today, the domestic calendar is empty, so the market will focus on the eurodolar cross and the Hungarian market.

The Slovak koruna appreciated from the level of EUR/SKK 30.45 to EUR/SKK 30.35 around the noon. But it retreated back till the end of the session and closed the day virtually unchanged. Today, the macroeconomic committee at the MoF holds its irregular meeting and the result will be probably change of the macro framework for 2009. We revised the forecast for economic growth from 6.5% Y/Y to 5.5% Y/Y and expect that the macro committee will do it very similar. The official result will be released probably early next week.

Fixed income

Polish bonds edged slightly higher in yields on the back of the weakening zloty on Thursday, but still managed to hold on to a massive part of this week’s gains. The improvement in sentiment has pushed yields lower by 50 bps on average across the curve, and while the long end has started to feel the heat from the softer currency, the short end remains under downward pressure as more aggressive rate cut expectations filter into the market. We should see the curve steepen further in the days to come with the direction of the move (bullish/bearish) likely to be dependant on the performance of the zloty.

The Hungarian bond market had a mixed day with the currency as yields dropped initially on the back of the strong currency, but this was fully corrected back in the afternoon. Turnover is however returning, which could keep the market also in the stabilization mode and although risks remain and market may hear some less positive news about the inflation outlook due to the weaker currency, there may be slightly brighter skies ahead.

Czech bonds got under pressure yesterday as investment bank UBS was massively escaping the Czech market. The situation is also becoming tough on the Czech money market, where the 1 month bid/ask spread spiked up significantly and hit the 10-year highs. Today the calendar of economic events is rather thin and the Czech fixed income market should follow the global risk aversion development. Hence at least at the beginning of the session the bonds should stay under pressure.

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Published on  Fri, Oct 31 2008, 10:22 GMT