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Central European Daily

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CEE currencies in wait and see mode ahead of ECB

Thu, Dec 4 2008, 08:38 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CEE currencies in wait and see mode ahead of ECB
Fixed Income: Czech 8-year floater posts another successful auction

Currencies

The Polish zloty traded lower against the euro within the EUR/PLN 3.80-3.90 range on Thursday. General sentiment remains soft for emerging markets with the weak US data (ADP, layoffs) not helping to restore confidence. The ECB rate decision will be eyed closely today and with the risks skewed toward a larger-than-expected cut, the verdict could be positive for the PLN in the short run.

The Czech koruna initially firmed to 25.50 EUR/CZK, but optimism vanished later during the session despite the slightly better performance of equity markets. The domestic calendar is once again empty today. The news about growing sales of passenger cars could hardly trigger any significant reaction. The market should stay in a wait and see mode ahead of ECB and BoE. More aggressive 75 bps rate cut may trigger slightly negative reaction on the Czech FX market.

There is not much to add to the Hungarian forint situation after yesterday. The pair has been trading in the range of 260-263, one big figure weaker than before, but generally following the broader international sentiment. The narrow range reflects that the market has been in the process of stabilization, similarly to what we saw after the 2003 and the 2006 forint crisis. In earlier cases, this stabilization took for about 2-3 months and was followed by sharp appreciation to between 250 and 260. This is surely not far from the current level, but foreign bond holdings seem to have continued to lower in November-December, therefore we may need some more time before foreign investors return to the market.

The Slovak koruna traded sideways yesterday with thin flows going through the market. The koruna remained frozen close to the level of EUR/SKK 30.25 for most of the session and slightly firmed towards 30.20 at the end of the day. Today, the eco calendar contains final Q3 GDP data. We expect the flash estimate of 7.1% y/y to be confirmed. The detailed structure should show that the economy was mainly driven by the domestic demand. The data, however, will have no impact on the market. The currency pair will continue to oscillate close to current levels.

Fixed income

The Hungarian bond market rallied again on Wednesday and yields dropped about 30-70bps across the curve, implying the disappearance of the 11% yield level. Domestic investors are still the main buyers of the securities, but due to the lack of supply this seems to be just enough for the market. The favourable bond performance on core markets could also have been a strong reason behind the rally as Hungary is still offering real interest rates of 7-8%. In light of this, short-term hiccups could be used to enter into the Hungarian convergence game as real interest rates could decline further in the coming weeks/months.

Polish bonds traded flat for longer maturities and slightly lower in yields at the short end of the curve as the market continued to price in further policy easing. Given the supportive sentiment in core markets and our expectations of a 75 basis points cut by the ECB today, we expect the curve might head lower in a steepening move in the run up to the weekend. Global factors will remain decisive in terms of sentiment in the days to come.

Czech bonds yesterday firmed and the yields moved down along the whole yield curve by 8-9 basis points. At the same time the auction of the 8-year government floater was relatively successful. From the offered amount of 10 bn CZK. FinMin sold 8.04 bn CZK. with an average yield of 75.17 basis points above current PRIBOR rate of 4.20 %. Worth mentioning is also the speech of governor of the Czech national bank Zdeněk Tůma, who said that CNB in near future won’t surprise the market with its interest rate decision. At the same time he did not want to anticipate any decision of the bank board on its next meeting, which will take place on December 17. We believe that the rate cut will be 50 basis points. Today there are again no domestic data scheduled. Thus meetings of ECB and BoE will be in focus. According to our view, the ECB might surprise the market by larger rate cut, which should support at least short end of the Czech yield curve.

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Published on  Thu, Dec 4 2008, 08:49 GMT