Czech inflation report to bring some insight for last week's rate cut

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Currencies: Zloty shows strong rebound
Fixed Income: Czech inflation report to bring some insight for last week’s rate cut.

Currencies

The zloty made an impressive comeback to the EUR/PLN 3.60-3.70 range as strong performance in US equity markets helped ease the extreme risk aversion which had weighed on sentiment over the last while. The move only confirms that the flight to and from safety (i.e. the dollar) remains the major market mover for the PLN. The trading day in Asia ended on a slightly less optimistic tone though, so we could see the zloty return to consolidation mode ahead of the weekend today. Liquidity has started to improve somewhat, but conditions are still far from normal. Hence risks are for further spikes in volatility.

The Czech koruna tracked the optimism on the CEE markets and gained quite significantly on Thursday. It might have been partially due to the Japanese help for emerging markets (via the IMF) and partially thanks to a weaker USD. Hence, the EUR/CZK failed break above the 25.53 resistance and dipped back to EUR/CZK 25.20 territory. We do not expect further gains today. First of all the deceleration of the GDP growth may weigh down on the Czech FX market.

The Slovak koruna firmed slightly below the level of EUR/SKK 30.40 yesterday in line with other currencies in the region. Today, the eco calendar contains flash Q3 GDP data. We expect some slight moderation against the previous quarter, but growth should stay above the level of 7%. The detailed structure will be released in December, but we expect the main driver was the domestic demand. Also, October harmonized inflation is on the schedule, but none of these figures will have an impact on the market. The koruna should continue to fluctuate around the level EUR/SKK 30.40.

The Hungarian forint was relatively stable between 268 and 272 on Thursday and neither the domestic nor international news were able to set a new direction. The Prime Minister called parties for an economic summit yesterday to talk about the economic future. Comments were mainly about the assessment of the current situation and contained little about possible measures. There has been no major news within Hungary over the next days, the central bank meeting on the 24th will be the key domestic event and therefore markets might follow the general emerging market sentiment.

Fixed income

Yesterday brought some interesting developments in the primary fixed-income market as the FinMin very successfully sold 13-week T-bill, which attracted very strong demand. As a result, the average yield declined from 4.45 to 3.74. The result of the auction clearly indicates that there is a lot of cash sitting on the sidelines, which later on may bring down long yields too. Today, the domestic calendar contains the release of a new inflation report. Hence, the market gets detailed fundamental explanation, why the Bank Board acted so aggressively when it surprisingly cut the official rate by 75 bps.

Polish bonds were little changed yesterday as the market ignored the consensuslike October CPI numbers and was unmoved by the strengthening of the zloty in overnight trade. Inflation came in a 4.2% y/y, with both softer food and fuel price growth responsible for the 0.3 pp drop in the annual figure from September. The implied core component stands at 4.3-4.4% y/y, also roughly in-line with expectations and above the MPC’s comfort zone. Policy makers have struck a softer tone in recent weeks amid the onset of the economic slowdown, but the impression is that the majority remains wary that cutting rates too early might pose a risk to the zloty and could impact inflation expectations. This said, while chances for a pre-emptive cut this month have appeared, we stick to our long-standing view that the start of the easing cycle will come in Q1 2009. As we have mentioned before, February seems the most likely moment for the first cut as the updated staff projection will be released then. Regarding today’s trading, bonds should follow the zloty higher (in prices) early in the session, before settling back into calmer pre-weekend range trade.

Hungarian bonds remained broadly unchanged and yields rose 5-10bps. Interest from abroad is still low, but at least the total bond holding of foreigners has stabilized around Ft2.6trn.we Not much to say about bonds beside the currency, market could calm down, but lower volatility could just be the next step in the recovery process as investors may see bond more attractive if risk/return profile improves.

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