The CEE currencies remain optimistic

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Currencies: The CEE currencies remain optimistic
Fixed Income: Czech inflation fell in line with expectations

Currencies

The Polish zloty made a massive recovery yesterday following the PM’s suggestion that the government may eventually exchange some of the EU related funds directly in the market instead of at the Central Bank. Donald Tusk’s wording was merely a trigger we think, with foreign players admittedly playing in line with the intervention talk and selling euro in the illiquid market. Volatility remains high and, while we could see the PLN easily extend the gains if the global sentiment improves ahead or in reaction to Geithner’s proposal on the financial sector bailout later today, its seems premature to call the PLN move a fully-fledged break in the medium term weakening trend. A calmer start to the session and range trade in the 4.40-4.50 range seems likely in the run up to the speech.

The Hungarian forint started the week in a positive mood and the pair appreciated from 292 to as high as 286 for a brief period, where it rebound overnight to 290. The Central Bank governor’s comments earlier highlighted the possible link between low interest rates and the weaker currency. He also said that central bank may have to slow down the pace of monetary easing, implying the possibility of maintaining the base rate at 9.5%. Newspapers leaked yesterday some more information about the government’s upcoming tax package. Higher VAT could raise concerns about inflation and this may also be an argument for tighter monetary policy, which could be beneficial for the currency.

The Czech koruna strengthened at the start of the new week despite miserable figures from the domestic labor market. The Czech currency took profit from prevailing optimism in the region and slight improvement in the global risk aversion (TED Spread, iTRAX). The pair touched 27.50 EUR/CZK in the midday, but failed to break below and trimmed most of the gains in the afternoon. We remain cautiously optimistic for today. The eyes of the traders should be on the shape of the second phase of the TARP and the subsequent development of the risk aversion on the global markets.

Fixed income

Polish bonds edged marginally lower in yields in reaction to the stronger zloty and the currency should lead the way for the fixed income market also today. Further out in time economic data will take over as the driver, with the CPI numbers due out on Friday a barrage of publication scheduled next week. We expect that in general, the numbers will be soft, and hence supportive for the market, which has recently shown doubts regarding the extent and pace of monetary policy easing expected in the months ahead.

The Hungarian bonds rallied with the currency and especially mid-part of the curve was strengthening, the 5-year benchmark yield lowered by 57bps to 10.97% in the fixing. However, in light of the upcoming tax changes and their possible negative implication for the inflation outlook, we would be cautious with the current optimism as it may quickly fade away if the market will face some 2-2.5pp higher inflation path for the second half of the year.

Czech bonds yesterday didn’t follow their European counterparts. While the long and the middle segment of the yield curve remained around its current values, yields of bonds with short maturities felt by around 20 basis points mainly as a result of the strengthening koruna and falling inflation. Yesterday the statistical office published January inflation which fell in line with our expectations to 2.2% Y/Y. This figure together with other unfavorable statistics from the Czech economy (January unemployment rose by fastest pace in the Czech history) indicated that further rate cuts might come soon. There are no data scheduled for today, we believe that Czech bond market will remain calm without big movements.

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