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Central European Daily

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Floods might imply higher bond supply in the Czech Republic

Wed, Jul 1 2009, 08:29 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Forint and zloty extend their gains
Fixed Income: Floods might imply higher bond supply in the Czech Republic

Hungary

Yesterday, the Hungarian forint extended its rebound against the euro. The EUR/HUF pair even broke below the 274/275 support area in a convincing way. The Hungarian currency continued to gain support from the approval of the tax bill on Monday. On top of that, the Q1 current account deficit (published yesterday morning) came out much better than expected. The smaller deficit for an important part mirrored the steep decline in domestic demand. Nevertheless, the data and the tax bill apparently supported investors’ confidence that Hungary, with the help of the IMF, finally found the road to a profound repair of its economic structure and a fix of its imbalances. There is still a long way to go, but at least for now, the forint enjoys these first green shoots. If global economic sentiment remains constructive, the forint might continue to enjoy the current positive momentum. The IMF yesterday also published staff report the Hungarian economy. They indicated that it was essential for the government to meet the budget targets but also added that it was prepared to discuss a possible extension of the country’s financing programme if necessary.

The rally of the Hungarian forint also supported the Hungarian interest rate markets with yields declining across the curve.

Czech Republic

The Czech koruna shrugged off very poor industrial production figures for May (- 21.7% Y/Y) and continued moved basically sideways yesterday. Although the EUR/CZK pair made another attempt to break below the 25.85 support level and it actually dipped to the EUR/CZK 25.83, we do not consider this as a successful break because the pair recovered latter on. Today, the release of the budget figures will be hardly a market mover. Therefore, the koruna will watch at other markets and the EUR/CZK pair might try to test the 25.85 support level again, which appeared a big challenge so far.

On Tuesday the Czech yield curve flattened and yields lost up to 3.5 bps at the very end of the month after weak May industrial production figures frustrated markets and sent bond yields down.

The June budget deficit released today should hardly have any impact. Thus, today’s trading may be quiet. However, damage after strong rains and floods may require additional financial resources, i.e. further bond issuance. Finance Minister Eduard Janota said in the local press that flood-relief funding will come from reserves, loans and perhaps a bond issue. Such news might push bond yields higher especially if US statistics show a further improvement too. Nevertheless yesterday’s weak domestic industrial production should curb the short end of the curve.

Poland

After breaking below the EUR/PLN 4.50 level, the Polish zloty extended its gains yesterday. There were no events which could clearly declare the positive price action for the zloty, but we believe that declining volatility in global markets supported carry trades with the zloty, which is not truly a high-yielding currency. Today, the domestic calendar is empty, hence the zloty will watch global events - particularly the US data (the ISM) and an reaction on global markets to them.

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Published on  Wed, Jul 1 2009, 08:44 GMT