• Home ::
• Fundamental ::
• Market View ::
• Central European Daily

• Send
• Print
• Add To
• Rss

Central European Daily

8ae98076-01ab-493e-8e9a-f58565fa053e

0

0

Czech koruna outperforms the zloty

Mon, Jun 22 2009, 08:37 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Czech koruna outperforms the zloty
Fixed Income: Hungarian NBH should stay on hold

Czech Republic

The Czech koruna extended it gains against the euro on Friday as the EUR/CZK pair broke below the 26.32 resistance. It is really difficult to find a reason to declare this the price action, but the fact that the koruna decoupled from further from the zloty indicated that some investors could be forced to make stop-losses on PLN/CZK carry trades. This could trigger further koruna strengthening if other regional currencies stagnate. This week is full of central banks’ meetings, starting today with the MNB meeting. We believe that this event will not be an eye-catcher for the koruna, which will rather watch an outcome of the German IFO business sentiment index.

Czech bonds lost slightly as the market was unable to react to the stronger currency during Friday’s afternoon as the market was already closed. Nevertheless price action on the swap curve was more visible as it clearly steepened in a bullish fashion. Obviously, the market bets more strongly on a rate cut and this opinion was further supported by the recent update of Reuters poll, which showed that majority of analysts expect a rate cut on Thursday (we still stick to ‘on hold scenario). The highlight of this week will definitely be the CNB meeting, but other central banks’ meetings might be interesting too. In this respect the domestic market might focus on the FOMC and the NBP on Wednesday too. Meanwhile the market mover might the strong koruna, which could push short term yields lower.

Hungary

The Hungarian forint finished the week in recovery mode and the pair gained back to above the EUR/HUF 280 level at 279. Domestic politics were a hot topic over the weekend as the major defeat in the EU Parliamentary Elections led to internal fights within the Socialist party. Party leader Ms Lendvai said that a new, young Prime Minister may restore confidence in the party, while others said that the young generation should work together with the old ones in the future.

The party may set up a new leading body that would prepare the party for the 2010 elections and some leaders also talked about the possibility of early elections after the budget law gets passed by the Parliament at the year-end.

At today’s central bank meeting, the committee will likely keep the base rate on hold. The statement could cautiously balance between the positive performance in recent weeks and the worse inflation data.

The Hungarian bond market strengthened with the currency and yields lowered marginally some bps on the day. Interest has however remained low as rate cuts are not on the cards yet, while the uncertainty about the global outlook keeps investors shy from the long-end.

Poland

The zloty once again failed to track the good performance of the Czech koruna. Some stop-losses on PLN/CZK carry trades could have contributed to the general underperformance of the zloty at the end of the week. The zloty failed to get below 4.50 EUR/PLN and weakened nervously in the late afternoon as the better than expected industrial output data were widely ignored.

Despite positive industrial output data, we continue to believe the central bank should cut interest rates by further 25 bps. Nevertheless the markets may pay more attention to global risk appetite. From that point of view we are not great optimists and we do not believe the zloty to come under 4.50 EUR/PLN in the very near future. Considering the PLN/CZK, it looks as all the carry trade positions could have already been liquidated. That would mean that the zloty is becoming really attractive to buy from the Czech koruna as we continue to be more bullish on the Polish currency in one year horizon.

• Download Full Central European Daily

Published on  Mon, Jun 22 2009, 08:46 GMT