CE currencies rebound strongly

Headlines

Currencies: CE currencies rebound strongly
Fixed Income: Czech central bank cuts by 50 bps, next move will be less aggressive

Currencies

The Czech koruna strengthened significantly due to several positive factors and the pair got back below 28.00 EUR/CZK. The main driver of the move was probably the press conference of the Czech national bank, which showed that the bankers plan to slow down the pace of monetary policy easing and that the new inflation prognosis counts with much stronger koruna (at 25.80 on average). Furthermore also the sentiment in the Central Europe improved significantly due to lower risk aversion on the global markets.
Today the sentiment can remain positive, at least in the morning. That is because demand for the Czech cars rises. The largest Czech manufacturer Škoda Auto starts to full-operate thanks to higher sales in Germany.

The Hungarian forint recovered sharply in the afternoon and closed the day some 2% stronger at 291. Hawkish tone from the Czech National Bank and better US equity sentiment helped the recovery. This news could mean that central banks are not completely immune for the currencies’ level and that inflationary concerns may limit the easing cycle. The Hungarian central bank will meet on the 23rd of February and then we may see what their stance on the issue is.

The Polish zloty managed to recover some ground yesterday in an apparent profit taking move that brought the EUR/PLN from 4.70 on Tuesday back below 4.60 early today. Stronger readings in Asian equity markets suggest the zloty could hold on to or even extend these gains in the short run. At the same time, we see no visible signs that the medium term uptrend for the pair has been broken to the downside, so renewed weakness, and certainly heightened volatility in the illiquid market seem to be a viable scenario for the PLN further out in time.

Fixed income

The Hungarian bonds remained broadly stable at high yield levels as the currency’s recovery was not followed by the fixed income market. Higher risk premia is therefore not included into the bond market, which could also help to ease the pressure on the currency.able currency. This is usually followed by an adjustment and fine-tuning of the short-end rates.

The Polish bond market failed to capitalize on the rebound of zloty on Thursday, which is, to say the truth, not a major surprise given doubts regarding the sustainability of the PLN’s move in the current volatile market conditions. Speculation on whether the MPC would cut rates as aggressively as expected given the pace and scale of the currency depreciation is not helping bonds either. While in the medium term we think rate cuts will materialize pushing bond yields (particularly the short end of the curve) lower, a cautious wait and see approach seems warranted in the run up to the barrage of economic data later this month.

Yesterday, the Czech National Bank met expectations and again cut rates by 50 bps, hence the base rate fell to 1.75%. The vote was 4:2 as one Board Member voted for a 25 bps rate cut, while another Member even voted for a 75 bps rate cut.
The CNB’s latest forecast envisages that inflation will decline to zero this year, and hit 1.4% in the first quarter of next year (the target is 2%). Thus an inflation threat is not relevant in the longer term outlook either, and interest rates may continue to go down. In addition to the significant improvement of the inflation outlook, the CNB also reviewed its economic outlook for this year, expecting a contraction by 0.3%, instead of the original growth figure of 2.9%.
Interestingly, the CNB for the first time released its EUR/CZK forecast, indicating that, after an initial depreciation in the first quarter of this year, the koruna should return to stronger levels, and subsequently stabilise. The central bank predicts that the average exchange rate will be EUR/CZK 25.80 this year.
The CNB’s outlook for interest rates also optimistically anticipates that money market rates will go up within the next twelve months. The three-month PRIBOR should hit 2.9% in the first quarter of next year, and fall slightly to 2.6% in the second quarter. This news triggered a negative reaction on the yield curve, which flattened in bearish fashion after the CNB’s press conference
The worse the economy performs, the greater is the likelihood of another rate cut. After all, the CNB also considers a “deeper and longer-lasting decline in economic activity abroad” to be one of the two major risks and uncertainties of the forecast. Hence, we believe that today’s rate cut will not have been the last one, even though the Governor indicated at a press conference that the bottom of interest rates was drawing closer. This signals that further steps by the CNB will be less aggressive. The central bank may thus prefer slower rate cuts, and continue to cut rates by 25 bps only. The significantly weakened koruna may also contribute to further, less aggressive rate cuts. We expect at the moment that the CNB will cut its rates by 25 basis points at its next meeting (March 26). However, the bottom of the easing cycle will actually depend on the latest data from the economy, while the ECB policy will play an important role too.

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