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Central European Daily

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The volumes on the Czech bond market continue to grow

Wed, Nov 5 2008, 08:54 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: US democratic victory may keep short-term optimism on the CEE markets
Fixed Income: The volumes on the Czech bond market continue to grow

Currencies

Despite a soft start to yesterday’s session, the Polish zloty managed to regain its foothold during the day and ended the session testing bids at the bottom of the current EUR/PLN 3.50-3.60 range. The result of the US presidential election will be the main focal point early in the session – strong trading in Asian equity markets suggests the victory of Senator Obama is likely to spur some short term optimism into global markets, so we could see more liquidity and calmer trading conditions today for the zloty. The market will then shift its attention back to the economy with high hopes for an ECB rate cut tomorrow and the payrolls on Friday.

The Hungarian forint had another day of range trading as the pair opened at 262, slightly stronger than the bottom of the previous day’s range of 263 and appreciated to 257, which is slightly weaker than the preceding top of 256. Overall creating a narrower daily trading range and this narrowing range or triangle formation could be followed by a new trend. Will it be a weakening or appreciating trend? Equities have opened stronger after the US election, so strengthening is probably more likely.
On the fundamental front, the EU Commission has cleared the way for the €6.5bn credit line for Hungary, which will be open for 5-year at a yield of about 5-6%.

The Czech koruna stayed in a sideways mode ahead of US elections and the CNB meeting scheduled for Thursday. Although the Czech currency trimmed initial losses, it failed to break below 24.00 EUR/CZK.
Today, the trade balance as well as initial optimism on the equity markets could be positive for the Czech koruna. Nevertheless the approaching CNB rate cut should prevent the koruna from significant gains and the pair may stay once again in a sideways mode above 24.00 EUR/CZK.

The Slovak koruna moved within the range of EUR/SKK 30.30 – 30.45. There was a tendency to appreciate in the morning but the unit moved back later in the day. The MoF officially released its new forecast of GDP growth for 2009. The Slovak economy should grow by 4.6% Y/Y what is a conservative forecast in our opinion. Anyway, the tax forecasting committee has a meeting today. The lower GDP projection should have negative a impact on the tax revenues in the estimated amount of SKK 10bn. The official new forecast could be announced probably till the end of the week. And this could possibly affect the state budget bill for 2009 (currently in the Parliament).

Fixed income

Polish bonds followed the zloty higher in prices on Tuesday. Yields dropped by 10 bps on average across the curve as investors slowly returned to the not-so-long-ago heavily oversold and illiquid market. While we still think bonds (particularly at the short end of the curve) have room to rally given the rate cuts expectations that have been building up recently, liquidity conditions remain tight, which suggests that heightened volatility could persist in the near term. We adopt a buy on dips approach at this stage for Polish bonds and expect the bullish steepening of the curve to continue in the medium term. At the same time we remain cautious on when to start buying bonds given the sub-par liquidity conditions.

Hungarian bonds had a good day as well, the curve shifted down roughly 10bps as the 10-year yield lowered to 9.8% and the 5-year to 12.5%. Central bank arranged HUF180bn repo with banks, which tool is aimed to boost demand at the shorter maturities and because local asset managers have been buying the long-end, the curve is under pressure to shift further down. In the meantime, foreign bond holdings have dropped to Ft2700bn, some 600bn decline in October and central bank published that foreign banks have bought €3bn on the EUR/HUF market. These data suggest that foreign investors have sold the most ever and probably some have been caught short on the forint and the quick recovery left them very few options to cover their short positions and left the market in a short forint position overall.

It seems that the Czech bond market is working properly again. Yesterday’s trading volumes were highly above the average but at the same time yields hovered around its current levels and thus remained relatively high.
Today’s trading will be again dependent on global sentiment. Yesterday’s optimisms should be rather negative for the bond market, on the other hand yields seems to be quite high thus we do not expect any significant yield rise. Besides, expectations of tomorrow's rate cut should push yields at least at the short end downwards.

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Published on  Wed, Nov 5 2008, 09:00 GMT