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Central European Daily

ECB opens 10 bln euro tap for Poland

Mon, Nov 24 2008, 08:54 GMT
by KBC Market Research Desk

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Headlines

Currencies: ECB opens 10 bln euro tap for Poland
Fixed Income: NBH expected to keep the rates unchanged

Currencies

The Polish zloty inched visibly lower against the euro at the end of trading on Friday from 3.80 at the opening to the upper bound of the current EUR/PLN 3.80-3.90 range. Liquidity conditions have improved slightly, but remain appallingly weak, which is the main reason for the persistent high price volatility. We should see the zloty recover somewhat early today given the strong performance in US and Asian equities. Also the fact that the EUR/PLN up-move was not mirrored in HUF and CZK markets suggests the reaction might have been a one-off transaction driven spike, which will be reversed rather quickly. Further out into the week: the EUR/PLN 3.80 - 3.90 range seems firmly in place though and while we could see some signs of recovery if the MPC keep rates flat as we expect it to on Wednesday, the range is likely to hold. A softer policy statement should leave no doubt that cuts will eventually follow in the months to come, but with a great deal of easing already priced in (70% of a cut this week) we should not see much of a reaction from the PLN, even if the MPC surprises us with an early move lower.

The Czech koruna stayed in negative territory during most of Friday’s session. Neither stronger equities nor the weaker US dollar helped the Czech koruna to rebound. It was partly due to the unexpected deal of Poland with ECB on the liquidity-help package, which brought some uncertainty to the Czech market as well. Hence the EUR/CZK inched up to 25.90. Today the situation may calm a bit and the Czech currency could take some profit from weaker US dollar. Nevertheless trading should be volatile and that is why we bet on broader range 25.55-25.90 EUR/CZK.

The Hungarian forint finished the week in a positive mood as the pair appreciated 2% from 271-272 to 266-268 against the euro. There was no specific news released and therefore other major emerging market currencies, like TRY or ZAR could have been behind the move. The PLN however corrected back later, which has not been followed by the HUF, so this divergence between the two may also worth the attention. This week’s highlight will be today’s central bank meeting, where a new Inflation Report will also be published. The market has not been looking for a move today, but some guidance about the future including the inflation path, which is affected by several factors. Recession prospect and the weaker exchange are the two most important from these. Since central bankers emphasized that their focus is mainly financial stability now, this meeting may not have a short-term impact thus the currency could continue to follow the international sentiment in the short-term, while the mediumterm outlook could be important to see whether 2009 will be a better year for the troubled currency.

The Slovak koruna was rather stable on Friday, oscillating within a tight range of EUR/SKK 30.40 – 30.47 as the market lacked any impetus. This week is relatively quiet in terms of data releases. The focus will be on interest rate decision of the central bank which takes place on Tuesday. In common with the market in general we see no change of the official rate. Today, however, the calendar is empty and there are no other events on the schedule which suggest a calm trading close to current levels.

Fixed income

Czech bonds in average trading volumes strengthened slightly on Friday, yields lost up to 10 bps and the yield curve flattened. No fresh domestic data were released hence their movement could correspond expectations that CNB cut rates at its regular meeting next month. No statistics are released today. Hence the main impetus for the bond market may be provided by eurozone markets, also Friday’s domestic yield decrease could support correction. However, the market can not expect any significant change. It is worth mentioning that minister of industry and trade mentioned that the government was preparing a package supporting Czech industry. No details were released but the package should base on tax reduction and export guarantees especially for small and medium corporations.

The long end of the Polish curve received unexpected support from local funds which decided to buy into the market at the fairly attractive price levels on Friday. Yields dropped by 10 bps (to 6.40%) in the 10Y segment with the scale of the move exaggerated by the extremely tight liquidity conditions. We keep to our long-standing view that the short end of the (flat) curve offers more value as rate cut expectations intensify ahead of the start of the easing cycle. The 2Y bond yield at 6.40% stands bluntly in contrast with expectations that official rates will drop to an average of at most 5.0% in 2009 and 4.5% in 2010. At the same time we remain extremely cautious to advise building longs in the current market conditions given the liquidity issues at stake. This week the MPC rate meeting will be the eye catcher, but until then trading is likely to remain driven by global sentiment.

Hungarian bonds moved stronger with the currency as usual and yields dropped around 20-50bps, the long-end outperformed. Not much to add to the basic story of the currency here, since auctions have been cancelled until January there is very little interest on the market, shown by basically unchanged foreign bond holding at Ft2600bn.

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Published on  Mon, Nov 24 2008, 08:59 GMT

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