CEE currencies trim some of the recent losses at the end of the week

Headlines

Currencies: CEE currencies trim some of the recent losses at the end of the week
Fixed Income: Czech budget deficit could reach 75 bln korunas, slightly below 3% of GDP

Currencies

The Czech koruna felt some relief late on Friday. After breaking above the 28.20 EUR/CZK level it took profit from the late positive reversal on the US equity markets and the pair came back to the 28.00 area. During this week regional sentiment should be crucial for the Czech koruna. We believe the Government proposals to tackle the crisis as well as the dovish comments from CNB should be widely ignored. We don’t expect optimism to return on global markets and are therefore quite sceptical about the koruna in the near term. Hence we see the chance the pair could come back above 28.22 EUR/CZK soon.

The Polish zloty fell victim to more aggressive profit taking on Friday as the EUR/PLN pair inched above 4.40 and to four and a half year lows in the 4.45 area in early trade. The zloty recovered some of the losses late in the day and while the rebound suggests we could see the unit find some respite early this week, the recent volatile price action suggests a cautious approach remains warranted in the short run toward the PLN. If the EUR/PLN fails to return below 4.40 today, we could see the zloty retest Friday’s lows in the 4.45 area or even head toward the psychological level of 4.5. Global sentiment will remain the key driver for the zloty in the days to come, with some attention going also to the last batch of eco data today (more in FI part) and the MPC rate decision tomorrow.

The Hungarian forint finished the week with a new record low at 291.20, in line with the weakness of other major emerging currencies. The Prime Minister started a round of negotiations with economists and civil groups about possible steps to tackle the crisis. However, not much has been said so far. The PM spoke mainly about the timetable, which would allow the Parliament to discuss the modifications in the coming months and implementation would begin on the 1st of July. He also said that the central bank and government should work together to limit excessive exchange rate movements, signaling that the government is now paying attention to the currency. This could be the first, highly cautious verbal intervention, which could be followed by more direct ones or central bank actions, like slower rate cuts if the weakening trend continues.

Fixed income

On Friday the Czech bonds lost in massive trading volumes and the yield curve steepened. As no domestic data were released, the main stimulus came from a risk aversion to the whole region. No fresh statistics are scheduled for today. As the Czech economic outlook deteriorates the ministry of finance updated its state budget deficit plan. Instead of CZK 38 bln. gap approved by parliament, the new forecast diminished the GDP increase to 1.4% y/y and the deficit pushed up to CZK 75 bln. Today the government should approve the new financial proposal. The new financial plan should release new bonds and the market could react negatively especially at the long end of the yield curve. The increase at short end of the curve may be limited by expected rate cut.

The weakening of the zloty triggered a massive sell-off in the Polish bonds market last week. While yields seemed to have leveled off roughly 40 bps above levels seen midway through the month on Friday, the risk is for more weakness induced by the soft global sentiment and the weakening currency. Nevertheless, we keep to our stance that the corrective rise in yields is a good buying opportunity at the short end of the curve, given the likely aggressive rate cuts in store from the MPC in the months to come. Low liquidity remains an issue which has kept bonds constantly underperforming though and we would look for some improvement in global risk appetite conditions (and less market volatility) before stepping into the market. Regarding today’s trading the last batch of domestic eco data (retails sales, unemployment) should complement the picture of deteriorating economic growth. Even though consumption numbers in the holiday season seem to have the most potential to surprise to the upside (or at least not to surprise to the downside) the softer than expected labor market data, weakening confidence indicators, and soft figures from the real economy already released this month all point to a softer than expected reading. The consensus stands at 5.6% y/y growth, but the risks seen skewed to the downside even from our conservative (and bond friendly) estimate of 1.0% y/y.

The Hungarian bond market gave back all the gains we have seen this year and the 3-year yield rose back to 10% and the 10-year to 9%. The debt management agency said that there will be no auctions until 2Q09, so market will see no supply in February and March. Foreign investors’ interest also sank with the currency quickly on Friday and it will be interesting to see whether this means an end to the stable demand we have seen before. The outlook could much depend on this as there will be no major news on the fundamental front.

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