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Central European Daily

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CE forex markets calmer now, How long will it last?

Fri, Nov 21 2008, 09:01 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CE forex markets calmer now. How long will it last?
Fixed Income: CNB extends liquidity-providing repo operations to 3 months

Currencies

The Polish PM came short of back stepping from previously made declarations regarding the 2012 euro adoption date yesterday. Donald Tusk indicated that he was open for discussion (with the opposition) on the precise timeline, but reiterated that Jan 1 st. 2012 remained a fully realistic target. The meeting with the MPC and NBP board members did not produce spectacular results, although it did confirm that the central bank would be working very closely with the FinMin so that Poland is able to meet all necessary procedural and economic obligations within the desired (i.e. ambitious) timeframe. While we are skeptical on the chances for a political agreement on the 2012 accession date, the PM’s wording suggests that hopes for a quick entry have not all been abandoned. This should be supportive for the PLN in the short run. We expect a calmer session ahead of the weekend, with the PLN likely to trade within the EUR/PLN 3.80 – 3.90 range today..

The Czech koruna was a bit more stable during yesterday’s session as regional currencies and EUR/USD were also less volatile. The EUR/CZK currency pair traded in a relatively tight range of 25.60-25.76. There were no (FX) market moving factors yesterday and this will also be the case today. If there is no big movement in other Eastern Europe Forex markets or in the eurodolar market, the koruna will continue to trade sideways.

The Hungarian forint set a new 1-week record low at 272.60 yesterday as emerging market currencies remained under pressure on the back of continued capital outflow. Portfolio rebalancing however became more silent than in October, while overnight recovery of Asian equity markets suggests that the forint may not be just a one-way bet. Next Monday’s central bank meeting could be important for the market as views about interest rate policy differ on a wide scale. Recent comments highlighted that central bank will set interest rates in order to help financial stability and inflation concerns will be of secondary order for the time being. This could generally mean that interest rate could stay high at 11.50% until risk about further currency weakness is imminent.

Fixed income

Polish bonds were little changed on Thursday despite the barrage of domestic data. Liquidity remains low with equity markets rather than bonds set firmly in the spotlight. Regarding data, yesterday’s batch came out mixed. On one hand IP growth was lower than expected (0.2% y/y) but managed to avoid dropping into negative territory. On the other, core CPI came out a tad higher (at 4.5% y/y, due to rounding error). While the market is still likely to bet on a cut next week, we stick to our slightly more likely scenario, that the MPC will want to wait with the first cut as for long as possible. The issue of euro adoption in 2012 remains unresolved, with the government likely to engage in political negotiations with the parliamentary opposition. The weak zloty has so far failed to react to the widening interest rate spread, which seems to be a reason for caution as well for some rate setters. Nevertheless, with the market expectations for a move lower tightly anchored we continue to prefer the short end of the curve in the run up to next week’s meeting.

Hungarian bonds remained basically unchanged as interest is low and there hasn’t been real news to them. Sentiment is pretty quiet which makes bonds less interesting for short-term players, but this could be favourable in the process of stabilization that may increase the attractiveness of high yields.

The short end of the Czech curve shifted downwards and tracked sentiment on the global markets as well as mounting expectations of further interest rate cuts. Nevertheless the longer maturities were more stable or even went slightly higher. The market more or less ignored the introduction of new facility designed to provide the banking system with longer 3-months liquidity. Hence the PRIBOR, on still more or less illiquid market, went down only marginally. Today may be calmer, although we believe that current yields can still be attractive for buyers, especially on the short end of the curve.

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Published on  Fri, Nov 21 2008, 10:13 GMT