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

• Send
• Print
• Add To
• Rss

Central European Daily

b5ea7d83-23a5-44b8-bcc8-b1615e9d9da8

11

0

Trading conditions have modestly improved

Tue, Nov 4 2008, 08:47 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CEE currencies in wait and see mode ahead of US election
Fixed Income: Trading conditions have modestly improved

Currencies

Even though volatility remains high in the Polish FX market, the zloty seems to have settled into a ST range between EUR/PLN 3.50 and 3.60 in the firmer global risk appetite and stronger liquidity conditions. All eyes today will be on US politics so we could see even calmer session in the run up to the elections, before the market turns its eyes back to data (payrolls) and the ECB later this week. We keep to our stance that a further weakening of the zloty to EUR/PLN 3.70 or above in case of renewed risk aversion could present a good medium term buying opportunity for the local currency.

The Hungarian forint started the week in a good mood and the pair recovered to 256/€ again in the morning session. However, sentiment turned sour again later and overnight weakening saw it as low as 263-264, although it seems to be opening a little stronger this morning. Domestic news did not change the picture yesterday. Lack of interest on the bond market could be a bit of concern for the HUF as it still needs some capital inflows to remain stable. In previous cases of HUF crises, the stabilization period saw currency weakening when yields were not attractive enough and the cycle of a weaker currency followed by bond market correction triggered the adjustment of risk premia.

The Czech koruna slightly weakened in line with its regional counterparts on Monday. Nevertheless it was not any major sell off, but rather a moderate correction of previous gains driven by the global strength of US dollar that pushed the pair back above 24.00 EUR/CZK. The new gloomier growth forecast of the European Commission (EC) had hardly any impact on the trading. The Czech Republic is still considered by the EC as one of the most resilient economies in Europe.
There are no important domestic events today. The Czech koruna should track the regional sentiment that may be driven by the US dollar and the global equities development in light of the US Presidential Election.

The Czech bonds yesterday continued in the correction and firmed. Middle and long segment of the yield curve thus came nearer to levels before the market has frozen in the middle of October. The short end of the yield curve on the other hand followed weakening koruna and rose.
Today with the absence of Czech as well as global statistics we expect relatively calm session. Due to expectations of rate cutting on Thursday we believe that at least the short end of the yield curve should move slightly downwards.

The Slovak forex market was quiet on Monday. The exchange rate oscillated within the range of EUR/SKK 30.35 – 30.55. Trading activity is low. There was an auction on the fixed income market. MoF sold almost SKK 1 bn of zero coupon bonds with an average yield of 4.59%. We expect a quiet trading today.

Fixed income

Polish bonds were little changed in the face of the still quite volatile zloty. Even though trading conditions have improved modestly liquidity remains an issue and apart from the very short end, where rate cut expectations have been building up, the curve is hardly sensitive to domestic fundamentals. The FinMin’s October inflation estimate at 4.2% y/y came in spot on our consensus-like expectations and was altogether ignored. With the calendar empty for the week to come all attention will go to global markets and the zloty. We could see bonds trade flat in the days to come if the currency sticks to the range mentioned above.

Hungarian bonds followed the currency as usual these days, yields opened lower first and later corrected back, leaving the key 10-year yield broadly unchanged at 9.7- 9.8% level. If the current yield levels are not attractive for foreign investors, we may see another wave of correction higher, but generally this still seems to be part of the stabilisation that usually takes place after a forint crisis. Market is also uncertain about the new inflation path and although the previous central bank forecast of meeting the target by end-2009 could be maintained, this uncertainty may weigh on demand until the end-November meeting, when the next report is due.

The Czech bonds yesterday continued its correction and firmed. Middle and long segment of the yield curve thus came nearer the levels seen before the market froze in the middle of October. The short end of the yield curve on the other hand followed the weakening koruna and rose.
Today, in the absence of Czech as well as global statistics we expect a relatively calm session. Due to expectations of a rate cut on Thursday we believe that at least the short end of the yield curve should move slightly downwards.

• Download Full Central European Daily

Published on  Tue, Nov 4 2008, 08:57 GMT