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Central European Daily

CE currencies might temporary profit from FOMC decision

Thu, Mar 19 2009, 08:54 GMT
by KBC Market Research Desk

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Headlines

Currencies: CE currencies might temporary profit from FOMC decision
Fixed Income: Czech FinMin sold 10Y benchmark, but the pricing was not favorable

Currencies

Following the weak start to the session the Polish zloty rebounded sharply in a knee-jerk move late yesterday in reaction to the FOMC’s announcement that the Fed would buy government and mortgage related securities. The EUR/PLN ended the day trading below 4.50 and while we think more aggressive quantitative easing may be positive for the PLN in the longer term, we have our doubts as to whether the move higher from the zloty will be continued today, given the mixed performance of equity markets in Asia.

The Hungarian forint was helped by the Fed’s aggressive action and the pair appreciated overnight about 1% to 298. The weakening trend had been intact before that during the day and the currency reached a new one-week low of 302.50. Can this be the end of the correction that we have been seeing since 293? We doubt it, but nevertheless it will be interesting to see how markets will perform today.

The Czech koruna tracked other currencies in the region and weakened a bit yesterday. The price action could be also a result of the closing of wrongly hedged positions of some exporters.

Yesterday’s FOMC meeting might sound supportive for the all region, but we will see whether the koruna will be able to benefit from it. Some noise from the domestic political scene (the opposition calls for early elections again) might block the koruna’s gains.

Fixed income

Polish bonds traded higher in yields yesterday as the zloty came under renewed pressure early in the session The market ignored the slightly stronger than expected IP numbers. Output was down by 14.3% y/y, compared to the consensus of 16.4% y/y, with the surprise likely resulting from the unexpectedly strong impact of the scrap subsidies in major export markets for the car industry. The market may scale down some of the losses today after the Fed announcement yesterday, although we think the strength of the potential rebound will be limited by the modest recovery from the PLN.

The Hungarian bonds had a quiet day as neither news nor the currency had any meaningful impact on them. Participants cheered AKK’s debt buyback plan in last days, but this story has been running out of steam, so the market is looking for a new impact.

Yesterday, the main issue on Czech bond market was an auction of 5.00%/2019 paper. The Ministry of Finance offered CZK 8 bln. The sale should represent a test how the Czech market can absorb domestic bond’s issuance. Surprisingly the demand exceeded the supply and the Ministry increased the volume to CZK 20 mld. At the end it sold bonds for CZK 12.615 bln. and 7.387 bln. kept in its books. However, the average yield was 5.619%, i.e. higher than had been expected, which is obviously a negative message for the secondary market, where yields moved higher.
Today’s trading might be influenced by yesterday’s FOMC action, which could bring some relief to the market, but we expect that sentiment on the bond market (particularly) will not improve and Czech bonds might underperform, while asset-swap spreads will widen.

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Published on  Thu, Mar 19 2009, 09:02 GMT

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