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Central European Daily

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CNB stays on hold and surprises part of the market

Fri, Jun 26 2009, 08:50 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: The zloty appreciates less dovish tone of NBP and better retail sales
Fixed Income: CNB stays on hold and surprises part of the market

Czech Republic

The Czech koruna gained strongly as the CNB surprised part of the market with its decision to leave the official rates unchanged and mainly with neutral to slightly hawkish comments yesterday. Interestingly, the koruna initially weakened after CNB’s decision, but later on when first comments from the press conference hit screens the currency started to firm. The Czech currency was also supported by a weaker USD, which has usually a negative impact on the EUR/CZK pair.
So, as a result the EUR/CZK pair has managed to open below the 26.0 level this morning and we expect that the pair will probably test the key 25.85 support level as the market might continue to digest yesterday comments from the CNB. We think that the EUR/CZK pair will break below this key support only if the sentiment in global equity markets were to remain bullish.

The Czech National Bank surprised the market yesterday by leaving its key interest rate unchanged at 1.5%. The market reaction was quite logical – the yield curve flattened in bearish fashion as for instance the 2Y swap jumped by around 10 bps

CNB’s Governor Zdeněk Tůma defended the decision by saying that the worst is behind us and that the risk of a significant economic decline has fallen from previous months. He said the risks with regard to growth and to inflation are even. As concerns the koruna Tůma mentioned that the recent positive developments had no impact on Board’s decision. Interestingly, the vote was four to one for keeping rates unchanged.
While yesterday’s decision might be temporary negative for the Czech fixed income market – particularly for the front end of the curve, we stick to our outlook that the bottom for the Czech Official rate will be the 1.25 level (not the recent one). We particularly think that yesterday’s CNB argument that core inflation might move higher is not correct. Moreover the stronger koruna and weak economy will be push the CNB for another (final) rate cut.

Hungary

The Hungarian forint broke the 278.00 level yesterday and appreciated to the 275.00 one, which was tested several times in May-June. It seems that global sentiment towards emerging market currencies turned more positive and the high-yielding forint has been profiting from this.
The market may test the 275.00 level today and next week’s question could be whether this recent strengthening is only temporary or the beginning of a new trend.

The Hungarian bond market benefited from the stronger currency and yield levels lowered by about 10bps across the curve. Later however, the debt management agency (AKK) announced that it will raise the amount on the biweekly bond auctions from Ft15bn to Ft24bn. This will mean that 10bn of the 3-year paper and 7-7bn each from the 5- and 10-year papers will be offered.

The market took the increased supply with disappointment and yields rose back by about 10bps. The market may not welcome the additional supply, but it also marks another step on the road to restore the market based financing of the government instead of the current IMF/EU backed loans.

Poland

Comments coming from Polish central bank more and more confirm our base line scenario that the NBP has already reached the bottom in the cutting cycle. It seems that key median voters Andrzej Slawinski and Jan Czekaj both seem to be less dovish and should support no change verdicts at least during the summer. Although we believe that growth can be a bit worse than NBP and the government predicts for this year, it should not be a major surprise. More important we agree with some of the key swing voters that the sentiment in the Polish economy may improve by the end of 2009. Hence there should not be space for further rate cuts even later during the year.

The zloty moved to 4.50 EUR/PLN primarily thanks to better sentiment on the global equity markets. Nevertheless the hawkish comments and slightly better retail sales could have played a role, too. Today the pair should be cautiously trying to stay below 4.50 EUR/PLN, but the sentiment is clearly dependent on the further movements of equities and EUR/USD.

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Published on  Fri, Jun 26 2009, 10:26 GMT