Czech bonds eye tomorrow's CNB meeting

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Currencies: Forint set new record low followed by MNB comments
Fixed Income: Czech bonds eye tomorrow’s CNB meeting

Currencies

The Hungarian forint set a new record low EUR/HUF 304 during the day as the currency extended its weakening. Central bank governor Mr Simor said however that the extreme currency volatility is harmful and said that the central bank has the tools to act against it. Confusingly, he added that they may introduce new tools as well, which implies that they believe the current tools are not adequate. We think current levels could be pro-inflationary and may also endanger the financial stability in Hungary, so authorities may remain vigilant about it. The market may react positively on these announcements, but if no steps follow, we may see further weakening a bit later.

Region-wide aversion has taken a turn for the worse again. The zloty lost ground massively yesterday alongside the forint and the Czech koruna, as foreign players continued to dominate on the sell side pushing the EUR/PLN above 4.60. Market liquidity remains low which makes the zloty even more vulnerable to shifts in global sentiment, and while the pace and scale of the most recent weakening has little fundamental merit, at this stage we see no reason viable reason to expect a broader rebound in the market anytime soon.

The Czech koruna came under considerable pressure on Tuesday mainly driven by the heavy sell off of the Hungarian forint. The pair broke through 28.22 EUR/CZK and opened the space for further losses. Theses are quite probable in the upcoming sessions as we do not expect significant improvement in sentiment on the global financial markets. From a technical point of view traders should eye 28.789/28.85 EUR/CZK – the highs from 2007 and the lows from 2002. These are very strong technical barriers and we may see some attempts to test them in the near term.

Fixed income

Hungarian bonds lost again on the weak currency and fading rate cut hopes. The 5- year yield rose to 10.3%, closer to the record levels in October and widening longterm forward spreads shows that confidence in the outlook has deteriorated substantially. The 5y5y forward swap spread over the euro has widened to 310bp from 200bp, since central bank accelerated on the rate cut back in December, so market does not welcome the quick easing of the policy.

The Polish bond market kept its composure on Tuesday despite the weaker zloty and the rise in core market yields. The calm reaction at the long end of the curve suggests that the zloty weakening is indeed more of a speculative nature. At the same time the market might have mustered some support from the government’s apparent determination to keep the deficit target in place (PLN 18 bn) by a cut in spending worth roughly PLN 20 bn agreed upon yesterday night. Today the 2 and 5 year benchmark tender will be the eye catcher. With a total PLN 2.8-3.8 bn worth of bonds on offer the auction will help gauge whether the sentiment remains positive in the market.

The Czech yield curve steepened on Tuesday. Yields, in below average trading volumes, lost up to 9 bps at the short end of the curve as the market is counting on a rate cut. No fresh data are on the calendar today. However, the most important event this week is Thursday’s CNB meeting. As markets expect a 50 bps rate cut, yields should loose again today especially at the short end.

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