Czech MinFin surprisingly gives mandate for Eurobond issue

Headlines

Currencies: CEE currencies recover, but will they sustain after NBP’s rate cut?
Fixed Income: Czech MinFin surprisingly gives mandate for Eurobond issue

Currencies

The EUR/PLN pair had a rollercoaster ride yesterday as the pair first edged back past the 4.40 mark and quickly into the 4.30 area in a profit taking move, only to return to testing bids in the 4.38-4.40 range in late night trading. The strong performance of Asian equity markets suggests that the market could again start the day on a positive note, although heightened volatility seems likely to remain a predominant element of the landscape in the market. Today the MPC rate decision will take the center stage on the economic front, and while we could see rates cut deeper than expected, aggressive action by the MPC is unlikely to hurt the zloty materially given the PLN’s recent weakness and the fact that trading remains driven by global sentiment rather than domestic fundamentals.

The Hungarian forint started the week on stronger footing. The EUR/HUF pair advanced to 284 after morning level’s around 288. General sentiment worldwide was driving the currency again and the Prime Minister’s hint that the tax reform package should not aim for tiny changes, but more significant ones. He added that changes could take place in July, September and 2010 January. This could mean that we may see higher VAT rate of around 23-25% instead of 20% in exchange for lower social contributions and personal income taxes.

Positive news from the banking sector, especially from Barclays about its 2008 profit, together with hopes on the stimulus package of the US administration improved sentiment on global markets. These helped emerging market currencies to recover. The Czech koruna firmed from opening values above 28.0 EUR/CZK below 27.60 EUR/CZK, nevertheless offshore trading showed again the reversal of the positive trend. Today, again the movement of the Czech koruna will depend on external factors. The meeting of the Polish central bank will be eyed closely, which could influence CEE currencies.

Fixed income

Interestingly, unlike the zloty, Polish bonds had a quiet session ahead of the MPC decision on rates today. The Council convenes for a shorter, one day policy meeting this month and is expected to cut rates by 50-75 bps according to latest polls. We marginally favour a deeper cut given the growing growth concerns and the improving inflation outlook, which would be positive for shorter maturities. However, a 50 bp cut with a clear message that more action is on the way would not be a disappointment for the market as well.

Hungarian bonds recovered some of the losses on Monday and yields lowered about 10bps across the curve as the currency’s stability helped investors to return to the market. Trading is otherwise quiet and this could remain so given light calendar in next days.

Several factors contributed to the losses on the Czech bond market yesterday. First, there were comments form CNB’s governor Tuma, who said that the weakening of the koruna has eased the pressure on the Bank Board in terms of rate decisions. Secondly, yields track higher on the core bond markets. Last but not least, the Czech MinFin announced its plans to issue a Eurobond and gave the mandates to Barclays, Česka Sporitelna (Erste Bank) and Deutsche Bank. While in theory this decision might support the domestic market, we see it as highly dangerous given the fact that sovereign spreads have increased substantially in the EMU bond market and the Czech state could easily face the same poor result of the Eurobond auction Poland did last week. Regarding trading, today, the Polish rate decision will be eyed closely. Should the NBP act aggressively and lower rates by 75 bps, the Czech market might feel that the CNB will follow the same course and the yield curve might steepen in a bullish fashion.

•  Download Full Central European Daily