Czech 8-year floater auction surprises with decent demand

Headlines

Currencies: CEE currencies extend losses as USD gains
Fixed Income: Czech 8-year floater auction surprises with decent demand

Currencies

The Polish zloty spiked higher against the euro late on Wednesday before falling back above EUR/PLN 3.80 in evening trade. The terrible overnight performance in US and Asian equity markets strongly suggests more upside for the EUR/PLN pair might be to come in the hours to come. A break higher, above the upper bound of the current range (EUR/PLN 3.80 - 3.90) would open the road to the October lows for the zloty (3.9880). On top of this, market activity remains erratic, and even if the zloty manages to hold on the range in the run up to IP numbers later today, the risk is that short term volatility will stay elevated.

Renewed capital flight from emerging market assets did not help the Hungarian forint either, but the currency’s relative performance has been rather strong. Many other EM currencies lost 2-4% during the day, while the forint was relatively stable between 268 and 272. The level of 272.40 is seen as the first Fibonacci between the recent low of 286.20 and previous high of 228.00 and therefore could be a strong support level. Regarding domestic news, details about the October budget figures and the Finmin’s November projection underpinned expectations that full-year deficit could be better than the recently revised 3.4% of GDP target. The IMF program set the target on the primary surplus at Ft215bn, Finmin sees this at Ft219bn. The first IMF review will take place in February 2009.

The Czech koruna tried to trim some of the previous-session losses in line with the region. The positive sentiment at the opening was supported by initial weakness of the US dollar. Nevertheless the turnaround later during the session and the massive sell off on the global equity markets pushed the Czech koruna back into negative territory above 25.70 EUR/CZK.
We are not seeing are many triggers that could actually change the negative sentiment today. Hence we do not exclude testing 25.85 and eventually a breaking above to the 26.00 area. The losses could be limited by the IMF-led rescue plan for Iceland that could play a modestly positive role on the emerging markets.

The Slovak koruna hovered in the range of EUR/SKK 30.35 – 30.45 during the Wednesday session. The regular government meeting did not bring any new information. The budget draft is still in the Parliament and waits for the final approval. It is clear that tax revenues will be lower due to slower economic growth. It is now a question of political will to reduce the expenditures or officially approve a higher deficit. The current target is to keep the public finance deficit under the level of 1.7% of GDP in 2009.

Fixed income

The Hungarian bond market did not move much during the day as the currency has lost only marginally and interest in the market remained low. Foreign investors bond holdings seem to lower further however data showed some minor decrease of Ft10bn on the day to just below Ft2600bn. Foreigners sold hefty amounts in the range of Ft700bn in October, but current global environment seems to insist further selling, albeit at a much slower pace.

Activity in the Polish bond market remains subdued with all eyes on global equity markets, the zloty and domestic macro numbers. The calendar will hit heat up today with the core CPI (no market mover) and the IP data (unlikely to have much impact in current risk appetite conditions) on the agenda. Nevertheless we are looking for a very weak industrial output reading in October. The deterioration was due on the one hand to the lower number of working days. On the other, the slowdown in exports has already started to weigh to the downside on activity in the sector. The car making industry for example showed signs of extreme weakness, with output down by 6.0% y/y last month, which is a massive deterioration compared to the ytd pace of 25.5% y/y. Our revised estimate for the headline IP reading stands at 1.5% y/y, with the risks firmly to the downside. A negative annual outcome could be positive for bonds at the short end of the curve.

Auction of Czech 8-year floating rate bond was yesterday’s main issue on the Czech bond market. Expectations for demand to be weak again similar to the previous auction in October, did not prove right. Demand reached CZK 18 bln and Ministry of Finance sold papers for CZK 12 bln while CZK 10 bln was planned only. The Ministry set coupon at 4.28% for the first 6 months, i.e. 76.123 bps above the PRIBOR rate.
No important events are scheduled for release today. The bond market may calm down after yesterday’s auction. However, global economic worries could send bond yields down even on the Czech markets.

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