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Central European Daily

Leading Czech opposition party says it will not adopt euro until 2013

Tue, May 19 2009, 08:55 GMT
by KBC Market Research Desk

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Headlines

Currencies: Leading Czech opposition party says it will not adopt euro until 2013
Fixed Income: Hungarian bonds enjoys global return to risk appetite

Czech Republic

The Czech koruna firmed slightly as the only stimulus was the renewed rally in global equity markets. The implied better sentiment in emerging markets universe sent the EUR/CZK pair in to the 26.7 territory. Even though the domestic calendar is empty today, the domestic political scene has delivered interesting comments, which could work as a mixed factor for the koruna in the longer run. The leading party in election polls – the Czech Soc-Dem said for the first time that even if it should win the elections later this year, it would not adopt the euro during the next election period. Shadow Finance Minister Bohuslav Sobotka said that he would consider it a big success to adopt the euro in 2014 or 2015. The reason is simple – the recent recession generates a huge budget deficit (around 5 % of GDP in 2010) and early euro adoption target would imply that the Sod-Dec would have to tight the budget policy, which would go against its election program, which is based in higher spending. Hence, in our view it looks like more realistic that the koruna will be replaced by the euro in the election period, which will take place between 2013 and 2018.

The Czech yield curve steepened in a bullish fashion as short yields dropped by around 5 bps yesterday. The reason for the price action could be the stronger Czech currency and the new more pessimistic macro projection the CNB reveled at the end of the last week. Interestingly, the finance ministry submitted a draft 2010 budget proposal to the cabinet yesterday, but debate on it was delayed until next week. The good news is that the proposal calls for freezing the amount spent on salaries for public sector workers, cutting the budgets of individual ministries by at least 10% (other than the defense budget) The plan calls for 0.8% GDP growth next year, which sounds a realistic target.

Today, the domestic calendar is empty, but we might see some pre-positioning ahead of tomorrow’s auction of 15Y benchmark. This might lead to further steepening of the yield curve, particularly, if the koruna strengthens further.

Hungary

The Hungarian forint started the week with a sharp rally after global market sentiment turned more positive and the IMF/EU gave another positive assessment on the program. International institutions agreed on a higher, 3.9% of GDP budget deficit target. This has been the third revision since last October, when the original program set the target at 2.6% of GDP, which was raised up to 2.9% of GDP. The market appreciated overnight further to 279-280, which is close to the 3-month high level we saw two weeks ago.

The Hungarian bond market followed the currency and yields lowered around 10bps. The long-end of the curve is just about to go below the 10.00% level again. Rate cut expectations have also intensified and the market sees almost 200bps rate reduction over the next 12-months.

Poland

The Polish zloty stayed stable and failed to gain on the global equity market rally. It is obvious that investors are cautious and therefore prefer to remain in wait and see mode after massive gains of risky assets in March and April. The Zloty did not appreciate hawkish comments neither by Dariuzs Filar, who believes that Poland should post growth in the first quarter, nor by Andrzej Wojtyna, who thinks that rates are near optimal level. Both central bankers currently clearly belong to the hawkish camp and their opinions are not surprising to the markets.

Today, labor market data are in the focus, notably employment and wage figures. These should clearly confirm that mid-term inflation risks have mitigated despite currently elevated level of the headline CPI. This could be slightly zloty negative, although most attention should be paid to the sentiment on the global equity markets, where the situation remains somewhat unclear.

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Published on  Tue, May 19 2009, 10:19 GMT

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