Czech 8-year floater auction in focus

Headlines

Currencies: Czech koruna weakens sharply on deteriorating industrial output
Fixed Income: Hungarian inflation and ECB rate decision in focus

Currencies

The Czech koruna climbed above the 27.00 EUR/CZK level for the first time since the autumn of 2007 due to exceptionally bad industrial production figures. Selling pressure was supported by higher risk aversion on global markets. The industrial production figures posted the greatest decline in the Czech history (-7.4% Y/Y). Even more alarming is the fact that the decline was broadly based and there was an even more dramatic deterioration in the volume of new orders. Today, negative sentiment might persist as the outcome of the ECB meeting may keep the whole region under pressure. Also from a technical point of view the pair has opened space to weaken further to as far as 27.40 EUR/CZK.

The Hungarian forint stabilized on Wednesday on a slightly positive assessment from the IMF and governments pledging to react to budget risks have so far calmed down the market. The pair traded within the range of 275 and 282, a tad narrower than on the day before. We think the announcement that the government could decide on further measures to tackle the deficit could be important information to the market. As in the previous forint weakening of 2003 or 2006, the peak of the weakening trend occurred at the time of such a statement. Although we do not know the exact size and form of these measures yet, uncertainty could decline and so the currency could switch onto range-mode. Today’s inflation data and ECB decision could be positive for the currency. We estimated a better-than-expected December inflation of 3.5% Y/Y due to the 10% slide of fuel prices. The Hungarian central bank will meet next Monday and given the recent volatility and rising 5Y5Y forward spread to a record 300bps against the euro, the risk could be for a smaller than expected rate cut The consensus is looking for another 50bps move, but we think the risk of a VAT hike in the remainder of the year argues for at least some cautiousness on monetary easing.

The Polish zloty came again under pressure on Wednesday. The polish currency tried to make some progress early in the session. However, global risk aversion and investor uncertainty ahead of the CPI release soon put the Polish currency again under pressure. CPI came out close to expectations at 3.3% Y/Y, but this release didn’t bring much info to the market. However, the perspective that the currency might lose interest rate support in the near future and the rising investor pessimism after a very poor US retail sales release kept the zloty under pressure. EUR/PLN revisited the 4.19 area, coming close to the key 4.20 resistance area. Today, the trade balance and current account data are on the agenda. We expect both import and export growth to show a significant slowdown in November, resulting in a slightly shallower trade deficit. The monthly C/A data are rarely a market mover, even if the picture painted is for more economic weakness. Global factors will continue to set the tone for trading. A sustained break above the EUR/PLN 4.20 area would be a high profile technical signal and trigger additional PLN losses (stop-tripping)

Fixed income

Yesterday, Czech government bonds firmed. Yields fell along the whole yield curve by 6-12 basis points. This development reflected rising global risk aversion and also the expectations of a rate cut by the Czech national bank after the publication of November’s industrial production data which recorded an historical plunge. On the other hand, this month’s only auction wasn’t very successful. The Finance Ministry sold 6.17 bn CZK out of total amount of 10 bn CZK worth of 8-year floating rate bond. The average yield was 72.994 bps above PRIBOR. Today the focus will be on ECB meeting.

The Hungarian bond market had a mild correction of about 10-15bps due to the somewhat stronger forint. However, given our concerns about the unknown budgetary measures to fill the gap on the revenue side, we would remain cautious about the bond market future before these are announced.

The Polish interest markets were subject to conflicting signal. The overall negative eco context and rising rate cut expectations (support by central bankers’ talk) continue to support the bond markets. MPC member Czekaj in an interview linked the scale of the next interest rate cut to the production data, to be published on Jan 20. We continue to see up-ticks in yields, especially at the short end of the curve, as an opportunity to add to PLN bond long exposure.

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