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

• Send
• Print
• Add To
• Rss

Central European Daily

c010512e-3cf6-4a28-84a1-dd1729450922

8

0

CNB is expected to cut rates this week

Mon, Nov 3 2008, 08:40 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Stronger equities support CEE currencies
Fixed Income: CNB is expected to cut rates this week

Currencies

The Polish zloty gave back some of last week’s impressive gains early on Friday, only to return from the EUR/PLN 3.65 mark to testing bids in the EUR/PLN 3.50 area at the end of trade. Interestingly the pair moved markedly lower despite the stronger dollar in a move that might help break the negative correlation with the eurodollar and bolster confidence somewhat in the market this week. This said, it is low liquidity that remains the predominant feature in the FX market, so heightened volatility is likely to persist until confidence returns to global markets. While we remain positive on the PLN in the medium and long run, due to the volatile price action up ahead we keep a cautious stance for the zloty in the short term. Back-step moves into the 3.70 area may provide for good MT buying opportunities.

The Hungarian forint opened on Friday at 262-263 as profit taking kept it weak at the beginning, but this did not last long as global equities remained in a good mood and emerging market currencies continued to recover. The pair appreciated quickly in the afternoon to as high as 255 and then stabilized at a slightly weaker level of 258. Overall, market still seems to be in stabilization mode.
Domestic media turned attention to the consequences of the HUF crisis, like the massive wage reduction for public workers and the political responsibility for the situation. Unions expressed their concerns that the government announced the wage cut without negotiations and some have said that after meeting the government on Tuesday this week, they will decide about the strike on Thursday.
On the other hand, the two small opposition parties (MDF and SzDSz) remained relatively constructive about the new budget proposal, so the political risk does not seem that high at the moment, although this could change if the public opinion toughens in case of strikes.
Surprisingly, Fidesz and SzDSz agreed on a new law that will introduce a cap on public spending for the budget. This could help Hungary to improve the medium-term fiscal policy framework and open the way to a tax reform program around 2010-2011, without endangering the fiscal deficit goals.

The Czech koruna strengthened back to the 24.00 EUR/CZK areas on Friday. It was mainly the optimism on the global equity markets that pushed the Czech currency to the stronger levels.
The same scenario may bee seen at the beginning of the new week as futures point to the positive opening of the equities. Also the news about the start of the production in the new Hyundai car-factory could help the Czech currency. Nevertheless the koruna may come back under pressure at the end of the week due to the interest rate cut and dovish comments from CNB

The Slovak koruna traded almost unchanged on Friday. The exchange rate moved within the range of EUR/SKK 30.40 – 30.55 during the whole day. Today, the budget deficit for the January – October is on the calendar and retail sales are scheduled for Wednesday.

Fixed income

Polish bonds were reluctant to follow in the footsteps of the strengthening zloty late on Friday, but the long end of the curve which had again started to feel the heat from the weaker currency last week, might get some relief early today. At the same time the short end of the curve remains under downward pressure as dovish rate setter comments support the idea of the start of the easing cycle in the months to come. Market has improved slightly over the past while, but conditions are still dangerously close to deadlock and renewed global risk aversion leading to a Hungarian-style crisis elsewhere in the region could easily send spreads higher again across the board. This is why we remain cautious on Polish bonds for now. Global risk appetite conditions and the sentiment in the FX market will be the decisive factors as far as the direction in the market is concerned in the foreseeable future. At the same time the fundamentals should help fuel the further steepening of the curve as the inflation outlook improves along with the deterioration of domestic and global growth perspectives. The FinMin October CPI estimate today will be eyed closely. Our preliminary reading stands at 4.2% y/y, markedly lower than the 4.5% y/y in September and most likely in-line with the market consensus.

The Hungarian bond remained shaky as the currency weakened and demand from investors is still low, although at least the turnover has increased. Trading looks to be the similar range trading that we saw in previous post-crises situations, yields are moving up and down within a narrowing range as market is accommodating to the new situation. Bonds will have to face a worse inflation outlook that could be hinted at in the central bank’s new Inflation Report later in November. This could warrant some cautiousness for bargain hunters despite the fact that yields around 12-13% look attractive.

On Friday Czech bonds experienced a vivid trading with volumes significantly exceeding average volumes. As no surprising news neither from economic or political scene was released, higher volume may be due to balance portfolios ahead of the month’s end. Expectations that CNB cut rates at its Wednesday’s meeting pushed down yields up to 13 bps and the yield curve steepened. During the day Ministry of finance also announced its auction plan for November. The ministry plans two 8-year paper’s auctions with variable coupons, each with CZK 10 bln. volume.
No fresh data should be released today and the new month should smooth trading volumes. However, expectations that CNB cut rates could hardly correct Friday’s price gains

• Download Full Central European Daily

Published on  Mon, Nov 3 2008, 07:51 GMT