CE bonds await CPI figures

Headlines

Currencies: Czech PM Topolanek attacks protectionist of some EMU countries
Fixed Income: CE bonds await CPI figures

Currencies

The Czech koruna weakened sharply late in yesterday’s trading session as risk aversion returned to markets, which triggered the sell-of in all CE Forex markets. However, the Czech currency underperformed other regional currencies and this fact might be related to growing tensions between the Czech Republic and France. The Financial Times quotes Czech PM Topolanek, who said "the response of the euro zone countries to the financial and economic crisis has deformed the joint project of the euro more than any other imaginable event”. Hence, the koruna is under downward pressure and the pair EUR/CZK is now very close to the key resistance level standing at the 28.80. So the market might test this level in coming hours, especially if market sentiment in global equities deteriorates further.

The chilly reception of the highly anticipated US financial bailout plan by markets spilled over the region yesterday evening. The zloty slipped lower by over 2% against the euro overnight, and the EUR/PLN seems to have stabilized in the 4.50- 4.55 range. In current circumstances, chances for a deeper PLN rebound seem limited at least until equity markets regain their composure. This said, it’s worth noting that the US equity market move lower was not mirrored by Asian stocks, which might suggest that despite the strong initial weakening yesterday in the end the downside for the PLN will be limited.

The Hungarian forint was hurt by the renewed global risk aversion yesterday and the pair weakened almost 2% during the day from 288 to 293.50. Two more comments arrived from the central bank policy makers though and both highlighted the importance of financial stability arguing for unchanged base rate on the next meeting. The central bank has cut the base rate four times since November, lowering it from 11.50% to 9.5%, but recent turbulence on local markets suggests that too low interest rate levels can have dangerous consequences. Friday’s key data about growth and inflation may have important information before the central bank meeting on the 26th.

Fixed income

The Czech bonds followed changing sentiment on the core markets, notably on the German bund. Growing in risk aversion and the sell off on the equity markets contributed to the bullish flattening on the Czech bond market. While longer maturities have cautiously strengthened, the short end remained under moderate pressure. Today we believe the Czech market may try to catch up with the development on the core markets overnight. After initial flattening, the market should calm down and we bet on mores sideways trading.

The weaker zloty was enough to push Polish bonds slightly higher in yields yesterday. The market remains focused on local macro data coming up late this week. With rate cut expectations having taken a hit from the weaker zloty in recent weeks, fixed income investors will be looking for confirmation of ongoing economic weakness and fading inflationary pressure. Until then more zloty driven consolidation seems likely for bonds.

Hungarian bonds maintained their level despite the weaker currency as buyers turned up and showed stable demand for the longer-end of the curve. However, this might be a short-term relief rally after the massive yield spike in the last two weeks. The government will announce a large scale fiscal package next Monday and the central bank is going to reassess the inflation outlook a week later, which may rearrange the outlook for Hungary. Prospect of a VAT hike does not paint a bright picture for bonds, although the underlying inflation could improve due to the deeper, 3-4% recession.

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