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Central European Daily

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Polish central bank moves towards neutral stance

Thu, Oct 29 2009, 09:30 GMT
by KBC Market Research Desk

KBC Bank

Headlines 

Currencies: CEE currencies under severe pressure on risk reversal
Fixed Income: Polish central bank moves towards neutral stance

Czech Republic

The Czech koruna went through a pretty dramatic sell-off although equity markets were closed for the National holiday. The pair broke above the important technical barrier at 26.30 EUR/CZK (50% Fibonacci resistance and several lows during 2008). Furthermore it closed above the 200 day moving average (currently around 25.50 EUR/CZK). If the holiday move is confirmed and the koruna does not trim the losses by the end of the week, the Czech currency may feel further short term pressure. The next target would than be at 27.10 EUR/CZK.

The weakness of the Czech currency is only partly a story of regional weakness as also the correction on the global equity markets might have had an impact. It started earlier this month after high representatives of the Central bank opened the possibility of quantitative easing. We believe that with the koruna at current levels, any form of quantitative easing is out of table. Hence the meeting next week could provide certain relief to the Czech FX market.

On Tuesday (the Czech Rep. had a national holiday on Wednesday) the Czech yield curve lost and slightly steepened. However, with average trading volume changes did not exceed 1.5 bps. As the domestic scene was without significant incentives, the price increase may be derived from the decline in the stock markets. Nevertheless, the weakening koruna prevented significant changes on the domestic bond market.

Today no new data are released again and yesterday’s holiday may weaken trading volume. It is worth mentioning that the Minister of Finance released first preconditions of prepared "popular" bonds issue. Next year the MinFin should emit 10 year’s bond for CZK 20 bln with nominal value of CZK 1000 and yield at 5% p.a. Small investors could buy them at post offices or via Internet.

Hungary 

The Hungarian forint hit the key level of 275.00 early yesterday morning after dropping about 2% from previous level of 270.00. The market tested again the 275.00 level overnight and the sharp move could signal that the weakening trend might have exhausted for now. The market started to recover to about 273.50-274.00 this morning, so it will be interesting to see whether the bear market trend could continue. Today’s unemployment figure crossed the 10% level at 10.3%, highlighting that the recession is not yet over in Hungary. The consensus expectation is for a bottom-out in the third quarter and slow

The Hungarian fixed income market followed the currency and lost value sharply yesterday. Yields rose about 25-30bps across the curve, pushing up the 3-year yield again to 7.25%, while the 10-year bond was traded around 7.40-7.50%. This levels are almost 50bps wider than a week-ago, so some consolidation could take place, except if the global playground remains in a shaky mode.

Poland 

The Polish zloty went through a severe sell-off yesterday, due to a spike in risk aversion and the strengthening US dollar. The pair shot as high as 4.29 EUR/PLN with almost no reaction on the NBP meeting. The Central bankers, as expected, left the interest rates unchanged at the record low level of 3.5%. As the inflation remains elevated and the economy is on recovery track, the NBP used the new inflation projection to change its main policy stance. In the statement, they said that the risks of undershooting and overshooting inflation in the medium term are balanced. Previously the medium term risks were skewed in favour of undershooting. Now the board more officially confirms the neutral stance of monetary policy, which is in line with our view of interest rate stability until the end of the year and moderate tightening in 2010.

For the upcoming sessions, the zloty remains a toy in hands of global players with risk. If the fatigue of Wall Street bulls prevails, the current weakness on the market can last for some time. Nevertheless we stick to our mid-term bullish view and believe the zloty should continue to trade below its 200 day moving average (4.38 EUR/PLN).

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Published on  Thu, Oct 29 2009, 09:54 GMT