Hungarian inflation declines further

Headlines

Currencies: The Czech koruna touches 15-months low
Fixed Income: Hungarian inflation declines further

Currencies

The Hungarian forint appreciated due to slightly better risk appetite worldwide and stronger peers despite the government announced higher budget deficit target for this year. The original plan was for a 2.6% forecast, which is now seen at 2.9% of GDP. This is a bit disappointing after the IMF visit, we thought that there could be further measures to tackle the deficit problem and the government decided firstly on a higher deficit path, while other measures could come later. The Parliament will have an extraordinary meeting on the 29th of January, so if preparations are quick we may see tax changes as well. Monday’s central bank meeting could see another 50bp rate cut, while risk of tax hikes could argue for more cautious monetary easing. We bet it could be just 25bp and recent market volatility could also argue for a smaller move.

The Czech koruna continued to be under pressure as bleak macroeconomic news from the domestic economy undermined the real story, while Czech central bankers were extremely dovish. Despite a better than expected outcome of the November C/A figures, the koruna slipped to 15-moth low against the euro to the EUR/CZK 27.45. Although the koruna, together with the rest of the region, might feel some relief today we think it might well remain under pressure in coming days.

The Polish zloty again faced a difficult trading session on Thursday. The global negative investor sentiment continued to weigh on the Polish currency. EUR/PLN spiked above the psychological barrier of 4.20 at the start of trading and stayed there for the remainder of the (European) session, even as the zloty managed to recoup part of the early losses later in the session. The Polish deputy Finance Minster said that Poland intended to start talks on ERM 2 entry in January or at the beginning of February. An entry in the mechanism in the first half of this year would allow the country to adopt the single currency in 2012. However, at least for now this commitment was no big help for the zloty. Negative global eco and financial sentiment continued to pressure the zloty against the majors. This morning, there is some easing in global market tensions and this helps the zloty to regain some ground. EUR/PLN returned below the 4.20 barrier overnight. There are no important eco data scheduled for release in Poland today. Global market sentiment will set the tone for PLN trading.

Fixed income

The Hungarian bond market saw strong appetite from foreign investors and yields lowered by some 20bp. The relief from the currency also helped and market is looking for further monetary easing and rate cut hopes keep interest on the market for now.

Czech bonds strengthened and the yield curve steepened on Thursday. Demand for bonds was enhanced by ECB interest rate cut. Beside that, there was a series of dovish comments coming from CNB in recent days. Today the are no significant domestic events. We believe that the yields on the short end of the curve still remain attractive. Nevertheless, investors may be more cautious as the koruna has weakened quite significantly.

The Polish interest rates declined slightly with the short end of the curve outperforming. The move was supported by ongoing talk from central bankers that there is room for a further easing in monetary policy. The head of the Finance Ministry’s Debt department indicated that Poland is still interested in selling bonds in foreign currencies, if the market conditions allow for such issuance. A benchmark issue denominated in euro is planned for the first quarter and the Treasury is also watching the other foreign markets, traditionally including the Swiss and the Japanese market.

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