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Central European Daily

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EC warns that Hungary may overshoot fiscal goals

Wed, Nov 4 2009, 09:44 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Zloty and forint stay weaker
Fixed Income: EC warns that Hungary may overshoot fiscal goals

Czech Republic

Could the signature of President Vaclav Klaus below the Lisbon treaty be the reason for koruna’s appreciation yesterday? Hardly, but the fact is that the Czech koruna has decoupled from its peers in recent days and it is hard to explain why. May be, one explanation could be found in carry trade deals, which had been established on PLN/CZK and HUF/CZK pairs in the koruna work as a funding currency. Fundamentally, the Czech currency now awaits Thursday’s central bank meeting, which must be very closely watched, because both a 25 bps rate cut (which is our base-line scenario) and stable rates are possible.

Like the koruna, the Czech bond market is also awaiting the CNB meeting and the yield curve volatility has remained very low in recent days. Taking into account the level of risk premia in the Czech market, which might say that a 25 rate cut is priced in (though not completely).

Hungary

The Hungarian forint spiked to a 5-months low of 282.00 yesterday in the overnight session and tested the key 280.00 level twice in the morning session. The sharp move however brought quick recovery thereafter and the pair edged up to the 276.00 level by late afternoon.

Global risk appetite seems to have been driving the currency these days despite EC released a bearish signal that this and next year’s budget deficit targets are at risk by projecting an above target deficit level of 4.1% and 4.2% of GDP for 2009 and 2010. The Parliament accepted the key figures of the 2010 budget yesterday, which cements the deficit target at 3.8% of GDP and allows deputies to propose changes without changing the main figures.

The Hungarian fixed income market recovered a bit with the currency in the afternoon after yield levels hit new highs. The 10-year was traded as high as 7.90% for a short-period, up almost 100bps from the level a week-ago. Higher yields could attract some new attention, while the FRA market also scaled back the expected future easing of monetary policy to about 75bps.

Poland

The Polish zloty started the session on weaker note on Tuesday and got as far as 4.33 EUR/PLN. There appeared rumors that hedge funds have been liquidating positions in PLN/USD. That could make some sense as most of the market participants were increasingly bullish on the Polish currency in the past weeks, but zloty failed to realize any profit so far. Later during the afternoon, the zloty calmed down a bit thanks to improving sentiment on global equity markets.

The domestic scene is unattractive for the whole week and therefore the zloty might more or less follow sentiment on Wall Street. Although short term volatility can be pretty painful for some speculative positions, the mid-term outlook remains clearly positive and we think the zloty should continue to trade below 200-day and 50-week moving averages.

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Published on  Wed, Nov 4 2009, 11:39 GMT