Czech 8-year floater auction in focus

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Currencies: CEE currencies recover in the afternoon
Fixed Income: Czech 8-year floater auction in focus

Currencies

The Polish zloty had a nervous session on Tuesday as the EUR/PLN pair held flat in choppy trade in the 4.10-4.16 range. The zloty failed to mirror the forint’s rebound late in the day and we think it might head higher on the improved regional sentiment today. The 4.02-4.08 range seems well within reach, although in the end the PLN’s strengthening potential will depend primarily on the momentum in equity markets. The December CPI numbers will be the highlight on the data front today, but for the sentiment-driven zloty eco numbers have been of secondary importance for some time now, so the unit is unlikely to react even in case the reading comes in far off from the consensus (more in FI part)

Situation heated up around the Hungarian forint after market talks about the risk of sizeable fallout of budget revenues proved to be a real concern in the coming months. IMF head Mr Strauss-Kahn said that the fund is “rather satisfied” with the program developments, but in a television interview late in the evening he said that the budget deficit target is not cemented. Finance Minister Mr Veres also said that if the global recession deepens, there could be further steps taken to rein in the budget deficit, but some room is also possible to modify the budget deficit target. Overall, it seems that the circulated Ft200bn amount could really be missing from revenues due to lower inflation and deeper recession this year and the government has started to act to counterbalance this, at least partially. The market has been aware of the situation by now, so budget slippage in itself may have been mostly priced into prices and yesterday’s move to 285.40 was probably caused by this. Since the government has been emphasizing that it can take further measures in the coming days/weeks, the currency has appreciated sharply to between 275 and 280, but situation is still unclear therefore markets could remain volatile in the coming days. In the past, budgetary slippage weakened the currency until the point where policy makers started to react, which could actually be now, but of course news about a possible increase of the budget deficit target could generate additional weakening. The EU Commission is expected to release new updated forecasts next week, which may be followed by new measures from the government to tackle the deficit problem.

The Czech koruna came under significant pressure and tested the 27.00 EUR/CZK level at the beginning of yesterday’s session. This may have been partially influenced by the losses of the neighbouring currencies at the start of the week. Nevertheless, overall regional sentiment has improved through the day thanks to better than expected US foreign trade figures and the koruna failed to break above 27.00 EUR/CZK. Today, we do not believe that global risk appetite will improve significantly. Moreover the Czech koruna may suffer form deteriorating industrial output. Therefore we do not exclude another wave of selling pressure in the upcoming sessions.

Fixed income

Polish bonds managed to hold on to recent gains yesterday, despite the weaker zloty. While a corrective move might still be in the cards we would rather bet on consolidation ahead of the barrage of domestic data due out over the next two weeks. Today the December CPI will be the eye-catcher. Our estimate stands at 3.4% Y/Y, which is spot on the market consensus and identical to the FinMin’s estimate released earlier this month. Inflation was suppressed mainly by the massive drop in fuel prices. The core component held flat we think, despite the weaker zloty, and should start falling in the months to come. With the headline CPI back to the permissible range (2.5% +/- 1pp) and with inflation to fall back to the target faster than expected (in Q3/Q4 the latest), the road to lower central bank interest rates and bond yields seems wide open. The release itself today should be neutral for bonds. Central banker comments which might follow could be relevant though, as the market will look to gauge whether the bid for aggressive rate cuts in Q1 is correct. We hold on to our baseline scenario, that official interest rates will fall by 150 bps, to 3.5% by the end of March, in steps of 50 bp.

Hungarian bonds weakened with the currency as usual these days, although yields lowered a bit at the end of the day as the currency recovered. The Prime Minister said that a tax hike is not planned, but we would be more cautious on bonds until the new measures are announced as we see risk of a VAT hike, which could derail the inflation outlook.

On Tuesday, Czech bonds strengthened with slightly lower than average trading volumes as stronger koruna and lower stock market returned investors’ interest to secure papers. At the end; the yield curve lost up to 6 bps and steepened. Today’s industry and construction production should show weak results. It may add support for bonds again especially when current yields are relatively high. Nevertheless, the auction of 8 year’s state float bonds is the main issue today. The Ministry of Finance offers bonds for CZK 10 bln. We expect that current interest for secure investment and scheduled low number of new issuances may initiate sufficient demand to cover the auction volume.

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