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Central European Daily

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The forint at fresh all−time low – EUR/HUF 300 level within reach

Fri, Jan 30 2009, 09:30 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: The forint at fresh all-time low – EUR/HUF 300 level within reach
Fixed Income: According to Fitch the Czech sovereign rating is not endangered

Currencies

The disappointing performance in equity markets and the fall of the forint late yesterday all suggest the Polish zloty is likely to come under pressure again today. The 4.40 level has provided the EUR/PLN pair with strong resistance over the last while, but all-in-all the zloty was unable to make a convincing rebound despite the stronger risk appetite conditions earlier this week. Unless the global sentiment improves (and we see little reason why it should in the short run) 4.40 might eventually give way, which would open the road to weakening in the 4.45-4.50 area.

The Hungarian forint broke out of the 283-288 range yesterday and started to head for the key 300 level. It dropped overnight to 293 by this morning, in line with other major emerging market currencies.
The Prime Minister announced further details about the tax reform package, which will include higher VAT rate of 23%, likely from the 1st of July and lower social contributions, personal and income taxes. Generally it will target no net change of the tax burden in the economy and the required Ft200bn saving could therefore come from spending cuts. This means that the package has a better structure than originally expected as it not only targets higher revenues. However, this may not matter much now for the currency.

The global market sentiment has worsened yesterday, after new pessimistic US statistics concerning job market as well as new home sales attracted again investors’ attention to global economic problems, which negatively affected the whole central European region. However the Czech koruna, in contrast for example to Hungarian forint, did not reveal excessive losses and ended the Thursday’s session 0.5% weaker than on Wednesday.
Today the focus will be on US statistics. The most interesting will be GDP and Chicago PMI. We believe that none of this data should bring much optimism tot the market, thus the Czech kourna might today extend its losses.

Fixed income

The Hungarian bonds had a sharp increase in yields as the market has started to face with a weaker currency and higher inflation due to the planned VAT hike. Low turnover has also contributed to the higher volatility. Almost all domestic and many international players have been optimistic about the bond market outlook on the back of the easing cycle and therefore there is now strong selling pressure on the market.

The Polish preliminary 2008 GDP growth numbers came in roughly in-line with expectations (despite being slightly softer than the official consensus formed late in December) and were ignored by the market. Headline growth was reported at 4.8% y/y, which was spot on our point estimate which we had to revise to the downside following the weak activity data for December. We estimate that Q4 growth came in slightly below 3.0% with consumption being the major (if not only) driver at 5.2% y/y and investments weighing to the downside. On paper this is a friendly environment for the short end of the curve, as the market may speculate on the need for more aggressive rate cuts. However, the soft global sentiment along with rising doubts regarding this year’s budget are likely to weigh to the downside for longer maturities in the near term. Hence we continue to bet on a steeper curve in the days and weeks to come. Today the barrage of US data will be eyed closely, but the highlight of the session will be the zloty. A move to the EUR/PLN 4.5 could spill over to the bond market in a pre-weekend profit taking move.

The Czech bonds yesterday firmed, when yields felt along the whole yield curve by 2-5 basis points. However the trading volumes were below average. According to our view, the development of Czech yields might have been influenced by the news that the planned auction of 5Y Eurobonds will be postponed. Also the statement of rating agency Fitch that despite its revised forecasts showing the Czech economy in recession this year, its rating A+ isn’t endangered, brought some optimism to the fixed income market.

There are again no data scheduled for today. Czech bonds might seek some inspiration to its European counterparts, while a weaker koruna might eventually post some limits to drop in yields.

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Published on  Fri, Jan 30 2009, 09:48 GMT