CNB vice-governor Hampl in favour of further rate cuts

Headlines

Currencies: CNB recommends not taking steps to adopt the euro during the crisis
Fixed Income: CNB vice-governor Hampl in favour of further rate cuts

Currencies

The Czech koruna lost some ground yesterday as the EUR/CZK pair touched the 25.92 level during off-shore trading. There were two reasons for the weakening: first, more dovish comments from the CNB and secondly the local press unveiled some conclusions from the central bank annual report on euro adoption. In this report, which should be approved by the government, the CNB will reportedly recommend the Czech Republic should not take steps yet to adopt the euro (by joining ERM II), due to uncertainty related to the global crisis. Today, the market might initially digest further speculations surrounding the CNB report on the euro adoption, which will be a hardly positive factor for the koruna. But the key factor for trading today should be a reaction of global markets to the US labor statistics.

The Hungarian forint repeated the trading pattern we saw earlier this week and the pair remained in the narrow range of 260 and 262, albeit overnight session saw it at 263 for a brief period. Lack of interest from foreign investors allows the currency to remain quiet, despite massive rate cuts in Europe. The global story of ‘quantitative easing’ could have some interesting aspects for the high yielding forint, as well. Disappearing real interest rate on core markets could later make the forint more attractive given that it is offering 6% real interest rate and the IMF package could secure the country’s external financing until 2010 March.

The Slovak koruna settled down under the EUR/SKK 30.20 threshold on Thursday. The exchange rate approaches the level of the final conversion rate. GDP growth for the third quarter slowed to 7.0% Y/Y from the revised 7.9% Y/Y in the previous quarter. The Slovak economy grew by the 7.1% Y/Y in Q3 2008 and Q2 2008 as well according to the former release. Koruna did not react on the massive ECB rate cut. But NBS might react as soon as possible and reduce its key repo rate next Tuesday.

Fixed income

The Czech yields declined modestly despite the opposite development on the German market. The positive sentiment may have been supported by the CNB vicegovernor Hampl pointing to the need of further interest rate cuts – we continue to believe in 50 bps. Yesterday the Czech finmin said it cancelled one-week T-bill auction and offers 6-months T-bills instead of that, reportedly due to market conditions. Today the market should stay in wait and see mode ahead of the US payrolls, which could provide positive impetus for fixed income instruments.

Hungarian bonds rallied again on the back of the 75bps ECB rate reduction and prospects of a 2% or lower eurozone interest rate level. Yields above 10% are now hard to find despite demand it still mainly coming from local institutional investors. So far, so good and given the one-way bet the market looks to be now, there may be more yield compression in the weeks ahead.

•  Download Full Central European Daily