Forint extends decline on weak IP figures

Headlines

Currencies: Forint extends decline on weak IP figures
Fixed Income: Czech inflation should show another significant decrease

Currencies

The Hungarian forint weakened sharply on Thursday as the weaker industrial production data together with global risk aversion took its toll on the currency. Industrial output dropped 12% Y/Y in November suggesting that the recession could be deeper than the IMF program’s 1% forecast. The worsening growth outlook moved the HUF into an underperforming position and the pair dropped more than peers to as low as 275.10/50, a new record low in 2009. Some stabilization took place later in the afternoon between 273.00 and 274.00. The Finance Ministry announced that the 2008 budget deficit target of 3.4%/GDP was met as December brought the expected surplus. The IMF will monitor the performance of Hungary’s program based on the 4th quarter primary balance result in February. This could be a positive assessment after yesterday’s result.

The Polish zloty traded flat in the EUR/PLN 4.02-4.08 range in slightly calmer, albeit less liquid trading on Thursday. The forint sell-off pushed the pair to the upper bound of the band, but the zloty quickly clawed back the losses to end the session roughly unchanged. Liquidity in the market has recently tended to vary from day to day though, and it’s too early to say that calmer price action is here to stay. Today the US payrolls will be eyed closely, but both will be significant market movers only if equity markets react.

The Czech koruna continued to move sideways yesterday despite very weak November’s trade figures and renewed weakness of the forint. The trade balance figure brought more evidence that Czech exports are no longer faring well. The drop in exports by 18% was the largest since the break-up of Czechoslovakia, and similarly great was the record-breaking decline in the exports of machinery and means of transport, which exceeded 21% this time. Thus the decline in the demand from EU countries is increasingly starting to affect the lives of Czech businesses. Hence, November’s trade balance figure indicates that last year’s trade balance surplus will not be as favourable as we originally expected. Hence we have cut our full-year forecast to a surplus of CZK 70 bn, meaning a year-on-year deterioration by nearly CZK 18 bn. Nevertheless, the trade surplus should start to rise again in 2009, due in particular to much lower prices of imported oil (with an impact of approximately CZK 100 bn). Today, all attention will go the December CPI reading, which should point to another big drop in year-on-year inflation (to 3.6 Y/Y) and that is why support more monetary easing. This will not be good news for the Czech currency, which might reestablish a weakening pattern in coming sessions.

Fixed income

Hungarian bond market weakened with the currency as usual these days and yields rose by around 30-40bps across the curve. Interest and therefore volume is still low on the market and this may remain so due to the currency’s volatility.

Polish bonds traded flat on Thursday in the absence of domestic market moving data and in the light of a slightly less volatile zloty. Liquidity conditions and domestic eco figures should remain the driver for the market in the weeks to come. We stick to our view that, while the former might remain erratic, the latter should be outright supportive for bonds, particualrly at the short end of the curve. Hence we would treat any corrective action in this segment as a clear buying opportunity.

The Czech yield curve flatten slightly on Thursday as weak Czech trade balance together with the stock market decrease had a little impact only. At the end yields gained up to 2.5 bps at the short end and lost 2 bps at the long end of the curve with expectation that today’s inflation shows a significant decrease. A set of fresh data follows even today. As unemployment plays a small role only, therefore the focus should be on December’s CPI (fro more read in the currency section). We expect favourable readings that could support demand for bonds – mainly at the short and medium segment of the curve. Any market reaction to afternoon’s US Payrolls may be limited due to shorter trading hours on Friday.

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