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Central European Daily

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Zloty leads regional losses

Wed, Nov 19 2008, 08:36 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Zloty leads regional losses
Fixed Income: Czech 8-year floater auction in focus

Currencies

The Polish zloty traded lower against the euro early on Tuesday but managed to recoup some of the losses and ended the session testing bids in the EUR/PLN 3.82 area. Market activity remains erratic, and while we might see range trade around current levels in the run up to IP numbers tomorrow, the risk is that short term volatility will stay elevated.

The Czech koruna tracked the zloty and was weakening significantly during most of yesterday’s session. The pair reached four-week highs, as far as 25.86 EUR/CZK. Even better than expected retail sales failed to prevent the koruna from weakening. Today, there are no domestic data to be released. Hence we expect the Czech currency to remain under pressure driven by the negative regional sentiment. From a technical point of view, there are strong resistances at 25.85 and 26.25 EUR/CZK.

The Hungarian forint kept in bearish mood on Tuesday as its Polish brother weakened further and the general EM sentiment has remained less supportive. The pair slipped into the EUR/HUF 270-272 range, roughly 1% lower. So the D/D move was smaller than that of the other currencies. This underperformance could probably be attributed to the 11.5% base rate. The main news was that IMF published the staff report behind the stand-by agreement. It paints a rather dark picture about the future in the form of massive capital outflow, recession and sharply lower current account deficit. According to our estimate, forecast tables imply an exchange rate of around 290. This could mean that the program is assuming a kind of pessimistic scenario for the currency in line with the assumption that government and external financing will be replaced from the €20bn IMF package. For us, this exchange rate path seems too weak as foreign owned banks could rollover most of their maturing loans, while foreign investors may not be able to sell the €8-9bn bond holdings due to the lack of domestic demand.

The Slovak forex market was relatively quiet. The local currency slightly depreciated against the reference Euro, towards the level of EUR/SKK 30.43. There is demand for liquidity among foreign investors and they are closing part of their positions. Regarding economic data, the unemployment rate was almost unchanged in October. Today there is only a regular government meeting scheduled and therefore we expect the Slovak koruna stay calm.

Fixed income

Polish bonds were little changed in the wake of the wage and employment figures, both of which came in roughly in-line with consensus (9.8% y/y and 3.6% y/y respectively), and the barrage of comments from rate setters that followed. The MPC arithmetic suggests the Committee is on the verge of cutting rates. Our baseline scenario is that the motion will fail to get the necessary majority by the smallest of margins as the Council remains wary that a tougher stance might be warranted in case the government confirms its ambitious euro zone entry plans. The 2012 target date has recently come under quite some stress though, and while the MPC might hold on to its guns for two-three months for the matter to be resolved, it will no doubt cut rates in Q1 2009. The MPC will look closely at the remaining figures later this month and the (weakening) zloty, which has wiped nearly all of this years policy monetary tightening off the table. With growth concerns gaining importance, eyes will be on the allimportant IP numbers tomorrow. The risks are for a weaker than expected, possibly negative figure. This would make the outcome of next week’s policy meeting even less predictable. The market is looking for a 25 bp cut next week (70% priced in) and these expectations are likely to stay in place in the run up to the meeting.

The Czech bond market remains thin. Trading volumes are well below average and also yields movements are negligible. Yesterday, the long and the middle segment of the yield curve hardly changed and the short end was driven slightly upwards by the weakening koruna. Today, we believe that activity at the fixed income market will remain low and thus the auction of the 8-year government floater should not be very successful.

Hungarian bonds weakened some 20-30bps on the back of the weaker HUF. Yields at the 3-year maturity rose to above 13.00% again, while the 3-months T-Bill auction saw bids 4-times the accepted Ft35bn amount.

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Published on  Wed, Nov 19 2008, 08:50 GMT