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Central European Daily

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Czech finance ministry sees deficit at 6.6% of GDP

Fri, Oct 30 2009, 09:11 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: CEE currencies reverse losses on better US GDP figures
Fixed Income: Czech finance ministry sees deficit at 6.6% of GDP

Czech Republic

The Czech koruna easily pared losses after stronger than expected US GDP. The pair came easily back below 200-day moving average (26.50) as well as 50% Fibonacci (26.30). If that is confirmed by the end of the week further potential for the losses should be limited.

Today the better than expected industrial output (-11.9%) points to certain recovery from the worst slump. Nevertheless this is too slow to prevent the Czech central bank from further monetary easing that we except as early as next week. Beside the global sentiment, the CNB meeting should be the main factor for the koruna next week. We bet on further interest rate cut, which is more or less expected. Nevertheless with the koruna at current levels we do not see the chance for other forms of quantitative easing, which some market participants are afraid of.

The Czech bond yields gained yesterday. They moved up due to a better mood on the stock market virtually along the entire curve, especially at the long end. The shorter end is less prone to the vagaries of global sentiment, and the strengthening koruna influenced its loss. The new forecast of the Ministry of Finance market had no impact on the market even if envisages a deficit at 6.6% of GDP for this year. After the yesterday’s price bond losses we expect that the bond market might calm - we have a busy week ahead and markets should be more cautious.

Hungary

The Hungarian forint tested the 275.00 level again yesterday morning, but the better US GDP figure helped it to stabilize slightly above that level in the afternoon. The IMF gave a soft warning by saying that the government is committed to the 2010 and 2011 fiscal targets, but there are upside risks. The IMF team has started third the review of the loan program this week and they may release a press statement in the coming weeks, which could highlight their concerns in more details.

Albeit we are deeply concerned about next year’s fiscal outlook, markets may not get excited too much by this until they see firm data about an overshoot or the (new) government revises the fiscal picture. This may not happen before spring next year,so despite our concern we do not expect markets to react much to these issues for now.

The Hungarian fixed income market also recovered slightly with the currency and yields lowered about 5-10bps in yield terms after losing about 50bps earlier this week. Foreign investors’ bond holdings declined Ft10bn to Ft2306bn, signaling that foreign investors are not that optimistic about the forint bond market, but local investors seem to have been supportive to the market due to inflows into pension and mutual funds, while reduced supply also helps the market.

Poland

The Polish zloty reversed losses in line with other regional currencies and the pair came back to the 4.21 EUR/PLN. Investors jumped back into riskier assets after surprisingly strong GDP figures from US economy. Beside that, also the markets clearly prefer the zloty among regional currencies as it is the leader in the change of monetary policy stance. Otherwise dovish governor Slawomir Skrzypek clearly signaled the bank had shifted from easing bias to the neutral mode with the risks to inflation broadly balanced.

The end of this week and the next one is empty on the domestic scene. Hence the trading should be solely dependent on the global sentiment determined mainly by the important data flow from US including payrolls and ISM.

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Published on  Fri, Oct 30 2009, 09:25 GMT