MNB cuts by 50bps and indicates more to come

Headlines

Currencies: Forint hits all-time low as MNB shrugs off its depreciation
Fixed Income: MNB cuts by 50bps and indicates more to come

Currencies

On Monday, the Polish Zloty stayed under pressure. The news flow was again negative. The European commission expects Polish growth to drop to 2% this year. Later in the session, the wage and employment data came out well below the market consensus illustrating that the global economic downturn is swiftly spreading into the polish economy. On top of that sentiment towards the region turns ever more negative, too. So, despite a brief rebound at the end the session, the zloty again closed the day deeply in the red.
Today, production data are on the agenda. We expect December brought further weakness in the industrial sector. Given the extremely weak PMI reading, we are looking for negative annual growth for the third month running, despite two additional business days. Another weak figure will only reinforce rate cut speculation. The trend for the zloty remains negative and we don’t see a trigger to change this sentiment anytime soon.

The Hungarian forint weakening trend was not disturbed by the central bank’s 50bps cut to 9.5% and the pair set up a new record low level at 287.00. The Central bank was not concerned too much about the currency as it said that the inflation target seems to be achievable with the current monetary conditions.
Where will the weakening trend finish? In the past, the currency’s weakening at some point did hurt the inflation outlook and higher long-term yields were a good indicator about this. When investors started to sell 10-year bonds, after some days or weeks the central bank also got concerned and verbal intervention followed. This sometimes meant the end of monetary easing, sometimes the beginning of a tightening cycle. The former is more likely this time as the market has been looking for additional 200bp rate cuts this year.
The long-end of the curve however remained unchanged, suggesting that the weakening trend could continue.

After Friday’s loses, the Czech koruna started yesterday’s session on a stronger footing. However, its gains were short-lived and the koruna soon followed other regional currencies towards weaker levels. It ended the session around 27.7 EUR/CZK.
Today the Czech statistical office will publish retail sales, but its market impact will be very limited and the focus will be again on the regional sentiment. The situation will be highly dependent on the Hungarian forint. If the forint continues to weaken after touching new all-time lows, the koruna will be hit as well. From the technical point of view, we see the next technical barrier at 28.22 EUR/CZK.

Fixed income

On Monday, Polish Bonds/interest rates were affected by conflicting incentives. The negative eco news and the rate cut expectations continue to point to lower interest rates especially at the short end of the curve. However, the pressure on the zloty, higher (LT) yields in core Europe and the negative sentiment on the region weighed on the longer end of the curve. So, Polish yields moved a few basis points higher except for the very short end of the curve. We expect this steepening trend to remain in place.

The Hungarian bond market acknowledged the rate cut decision with silence and yields remained unchanged. Taking into account considerations that the currency’s weakening could continue as long as the inflation outlook is affected, the bond market outlook seems to be clouded. The November Inflation Report assumed a constant exchange rate of 258/€ and forecasted the 2010 inflation between 1.5% and 1.9%, implying some 10% currency depreciation as tolerable given the 10% pass-through from the exchange rate onto inflation. The inflation has also improved since the report was published, so this 284/€ tolerance threshold could also have increase to around 290-295/€.

The Czech government bonds were yesterday positively affected by the rising global risk aversion, the rate cut by the Hungarian central bank and also by expectations of further rate cuts in the Czech Republic and Poland as well. Yields moved down along the whole yield curve by 6-13 basis points, with the biggest move at the middle segment.
Today’s retail sales will hardly have impact on the bond market (though it will be just evidence that the economy is slowing). We believe that high risk aversion together with the expectations of further rate cuts will still be positively influencing Czech fixed income instruments.

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