CEE currencies in positive mood as US dollar comes under pressure

Headlines

Currencies: CEE currencies in positive mood as US dollar comes under pressure
Fixed Income: NBP should stay on hold today

Currencies

With the zloty lagging behind its regional peers during the rally on Monday it was not much of a surprise to see the EUR/PLN head lower on Tuesday in a bid to make up for the ground lost against the HUF and CZK. The EUR/PLN tested bids in the 3.78- 3.80 area, and even though it eventually failed to make a sustainable break out of the current 3.80-3.90 range, the sentiment had clearly improved on the back of the easing global risk aversion. Today the MPC rate call will be the eye catcher, as we have argued it could, in the end, be supportive for the PLN. Rates should stay on hold, but the Council is likely to shift to an outright dovish stance before cutting for the first time in January or February.

The Czech koruna continued to trim the losses and the EUR/CZK even tested 25.00. The gains of the Czech koruna were primarily driven by better sentiment on the global equity markets that hit the US dollar and supported positive sentiment in the Central Europe. Today, we believe that the no change verdict from NBP might help to keep regional sentiment on the positive side. Nevertheless the gains of the Czech currency may be short-lived as we don’t really believe in the break through the EUR/CZK25.00 level.

The Hungarian forint remained broadly stable between 258 and 262 after the sharp appreciation on Monday. Market seems to have accommodated to the improved inflation outlook and accepted the lower interest rate as inflation could undershoot the 3% inflation target in 2010. The Parliament has accepted the required modifications to the 2009 budget setting the main revenue and expenditure figures as were laid down in the IMF program and a deficit of just 2.6% of GDP. The final vote will take place around mid-December, but further adjustments can not change these outlines, thereby risk of easing is low after yesterday. The smaller liberal opposition party SzDSz supported the minority government this time and they said they will support the budget in December, as well.

The Slovak koruna stuck in a sideways range moving between EUR/SKK 30.32 - 30.38. As in previous days the market lacked any impetus. The benchmark interest rate was kept unchanged yesterday at the NBS’s meeting, in line with the consensus estimate and our forecast. The subsequent comments and statement were neutral and had no impact on the market. This is however not surprising, as the NBS is already tracking ECB. We expect the next rate cut in December by 50 bps. Today, the eco calendar is empty, there are no other events scheduled and so the unit will further follow the trading pattern seen in previous days.

Fixed income

The Hungarian bond market strengthened further on the back of the central bank’s inflation outlook and yields generally lower 20-30bps on the day. Yields in excess of 12% have become rare and the 10-year narrows the key 9% level. The outlook is however still positive as the expected 2% inflation for 2010 sets real interest rate level at 9-10% in a world, where real interest rates have been disappearing.

Polish bonds rallied again further on Tuesday as the improvement in risk appetite made it possible for the market to price in expectations of the upcoming monetary easing. Yields dropped by up to 15 bp for longer maturities, making up for a 30 bps down move just this week. While price action is likely to remain equity market driven in the short run, it will be the MPC rate decision which will be the major focal point on the local agenda today. Our baseline scenario is that the motion to cut rates will eventually fail to get the necessary majority by the smallest of margins (the votes of Slawinski and Nieckarz) as the Council remains wary that a tougher policy stance might be warranted in case the government sticks to its ambitious euro zone entry plans. While we think the MPC will stay on hold today, it will be difficult for it to avoid mentioning the ongoing deterioration in growth perspectives and the softening in inflation risks associated with it. This means the Council is very likely switch from neutral mode to an outright dovish policy stance in a bid to prepare markets for the imminent cuts already on the table in the months to come (Jan/Feb ‘09).
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 6.20% has dropped by 20 bps this week, but it still 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, given even the ongoing liquidity constraints. A no-cut rate decision could push yields temporarily higher at the short end of the curve in a first reaction providing opportunity to play a steeper curve later in the day ahead of the dovish MPC statement.

Trading volumes at the Czech bond market were relatively small yesterday and also yields movements were not very significant. The short and middle segment of the yield curve rose by around 2 basis points, while the long end shifted in the opposite direction. Today there are no data or auctions scheduled, thus we believe that calm trading should continue.

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