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Central European Daily

The MNB slows its easing cycle today

Mon, Jan 19 2009, 08:50 GMT
by KBC Market Research Desk

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Headlines

Currencies: Sell-off of the Czech koruna and zloty continues
Fixed Income: The MNB slows its easing cycle today

Currencies

The Czech koruna extended its losses during Friday’s late trading as the EUR/CZK pair broke above the key resistance standing at the 27.40 level. There were two possible triggers for the koruna price action – first, the contagion from the Polish forex markets. Secondly, one US investment bank issued a very negative outlook for the Czech currency. Hence, the pair reached the fresh 15 month high at the 27.68 level. Today, the US markets are closed, so the attention might fully go to the Hungarian central bank. If the MNB act less aggressively and cut just by 25 bps as we think, it will be a temporary boost for CE currencies. Nevertheless, sentiment will probably remain negative to the CZK.

The Hungarian forint finished the week in a mixed mood. Somewhat better global backdrop like weaker JPY helped it to strengthen to as high as 276 quickly, but disappointing US data in the afternoon triggered quick correction and the pair lost all the previous gains and closed the week at around 279 after touching the 281 level. Today’s highlight will be the central bank’s rate setting meeting where market is looking for another 50bp rate cut to 9.5%. Inflation developments would warrant such a decision, while recent market turbulence together with the risk of a VAT hike later in the year may make decision makers more cautious about further easing. If the decision and subsequent statement balances between these, the forint could remain stable, if not, it may head for an all-time record low around EUR/HUF 290.

On Friday, the Polish Zloty came again under pressure. Most currencies in the region failed to take advantage from the slight improvement in global investor sentiment. A negative report from an investment bank on the prospects for the regional currencies might have played a role. Especially during the afternoon session, the zloty lost ground rather sharply and ERU/PLN closed the session in the 4.26 big figure. Today, the wage data are on the calendar. At the start of the new week, one might expect some consolidation on the recent zloty losses if global pressure were to ease. Nevertheless the picture remains zloty negative as long a EUR/PLN holds above the 4.20 mark.

Fixed income

The Czech bonds slightly weakened and the curve further steepened on Friday. That was probably due to slightly better attitude towards risk on global markets. There are no significant market movers scheduled for today and that may keep the Czech bonds in sideways mode with moderate negative bias. That should reflect slightly positive global equity markets opening and US holiday.

The Hungarian bond market did not move much on the last day as neither the currency nor news had any significant change on the rate outlook. Interestingly, foreign investors have bought about Ft100bn worth of bonds so far this year, buying back some 10% of the amount they dumped in October-November last year. This could be the first sign that there is a chance that the market could revive to some extent this year despite the troubled external financing situation. Prospects of further disinflation and rate reductions could keep interest for bonds alive in the next months, while the volatile foreign exchange market may also deter some investors, leaving the overall situation a mixed bag.

On Friday, Polish interest rates were again downwardly oriented, with yields lower across curve as rate cut speculation supported the Polish bond markets. Today, investors will take a look at the wage data and the employment data. Despite evident signs of a weakening in the labour market, (drop in employment, faster and larger seasonal rise in unemployment), wage growth remains robust. It takes up to two quarters for the economic slowdown to weigh on salary growth though. So a further slowdown seems inevitable in the months to come. The risks for the December reading are skewed to the downside though and any negative surprise should only reaffirm the rock hard rate cut expectations currently in place, along with the trend toward a steeper curve.

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Published on  Mon, Jan 19 2009, 10:01 GMT

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