Czech bonds eye Thursday's CNB meeting

Headlines

Currencies: Hungarian forint approaches 300 EUR/HUF
Fixed Income: Czech bonds eye Thursday’s CNB meeting

Currencies

The Polish zloty had yet another weak session on Friday as softer risk appetite conditions in the wake of weaker than expected data from the global economy weighed heavily on the sentiment in the region. The PLN’s losses (from EUR/PLN 4.40 early last week to 4.50 late on Friday) were limited compared to the HUF’s collapse to alltime lows. However, as the zloty failed to mitigate the contagion, it’s likely to remain susceptible to more weakening in the short run if the global sentiment deteriorates further.

The Hungarian forint reached a new all-time low of 299.30 on Friday as the currency continued to slide. Market has started to get concerned about reaching 300+ levels as households and the corporate sector could default on foreign currency loans. The Prime Minister said that the weak currency is of ‘extreme concern’, but there is doubt the government has any tools to directly manage it.

Generally, Hungary seems to be on track of the IMF program, which saw the currency around 290/€, but the market may start testing the resilience of the country against further currency weakness. Some market participants have started to speculate for further weakening on forced foreign currency demand from banks as they may have to close down companies’ foreign currency hedge positions and defaulting foreign currency borrowers will also require to buy FX to hedge the balance sheet.

The Czech koruna weakened quite dramatically and came back to the EUR/CZK 28.00 at the end of the week. It was mainly due to overall pessimism on the global markets and the heavy sell-off on the Hungarian forint.
We do not expect sentiment to improve very much during the week. Hence the pressure on the market should persist and the pair may get back above 28.22 EUR/CZK. Our mid-term target for the end of the sell off is at 28.80 EUR/CZK.

Fixed income

After a disappointing start to the session on Friday Polish bonds managed to recoup some of the most recent losses fueled by the weaker zloty. The market ended the week flat, or even slightly higher in yields for longer maturities though, despite the aggressive rate cut and softer than expected GDP numbers, as the soft currency fiscal concerns weighed on the sentiment. Regarding the latter the government, which only recently acknowledged that growth would be visibly slower than envisaged in the budget act, and that income estimates risk being significantly overestimated, is set to present a set of austerity measures worth up to PLN 17 bn. to keep the 2009 deficit target of PLN 18 bn intact. While the government’s commitment to fiscal stability might be enough to save the day in the eyes of the market if growth edges down to 1.5% y/y, and therefore could be positive for bonds at first. Investors seems aware that the risks for growth are skewed to the downside, and that the proposed measures might have to be extended to keep up the deficit target intact. This said we keep up our cautious stance for longer maturities for the week ahead and remain positive at the short end of the curve in anticipation of the aggressive policy easing expected over the next while. Today the FinMin’s CPI estimate (10:00 CET) will get ample attention. Our preliminary estimate stands at 3.0% y/y, but the risks are in fact skewed toward the 2.9% y/y market consensus.

Hungarian bonds had the second-day of the massive sell off that started on Thursday and yields generally corrected back to levels we saw in November. This means that market does not accept the lower yield levels that had been generated by the central bank’s easing policy. Therefore the market may also have to scale back on rate cuts, which took place also on Friday, but the FRA curve is still looking for additional 175bp easing, so they may have to go further to fully acknowledge recent developments.

The Czech bonds lost in low trading volumes on Friday and the yield curve flattened slightly. As no important data was released the bond decline depended on weaker domestic currency and higher risk aversion.

Budget balance releases today could hardly influence the market. However, it is important to mention that Mr.Janota, finance vice-minister, estimated during the weekend that Czech Republic could hardly fulfil Maastricht’s deficit criterion if GDP grow would drop below 1% y/y in 2009 due to lower income. He also stressed that no decision about Czech eurobond issuance has been made.
The CNB meeting on Thursday is the most important issue this week as the central bank could lower its interest rate. Nevertheless, today the week domestic currency and risk aversion may prevail again and send yield especially at the long end higher.

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