Hungarian and Polish CPI basically in line with expectations

Headlines

Currencies: Czech PM confirms that the country will meet Maastricht criteria in 2009
Fixed Income: Hungarian and Polish CPI basically in line with expectations

Currencies

The Polish zloty remains under pressure as markets have struggled to appreciate the Obama rescue plan for the economy and financial markets. Equities continued trading in an unconvincing fashion, which suggests more downside, or at least limited upside potential for the zloty at the start of this week. Further out in time, if risk appetite returns, we could see the PLN recover. The outlook for economic conditions has deteriorated further along with the softer expectations for growth in the EMU in the quarters to come, which has weighed on sentiment in the region. The Polish economy as no doubt been affected and this week’s eco numbers (IP, wages, employment) are expected to come in quite soft. As such, this would be hardly positive for the zloty.

On Friday, the Hungarian forint had a relatively quiet day between 296 and 300. Stat office released two important data, but they did not surprise markets and left the consensus view unchanged. GDP shrank 2% Y/Y in the last quarter, while inflation lowered further to 3% Y/Y in January. The Prime Minister will announce the details of the tax package today. Press has leaked that the budget deficit target could be increased to 2.9% of GDP from 2.6%, which could be negative news for the market.

The Czech koruna strengthened initially after better than expected GDP data on Friday. Nevertheless the persisting high risk aversion on global markets did not allow the Czech currency to stay in the positive territory and the pair came back to 28.70EUR/CZK. Today, trading might be calmer due to the US Holiday. On the other hand, the Czech currency should find every attempt to the trim losses very difficult as the global picture remains rather gloomy. The Czech currency may test 28.80 in the upcoming sessions – very strong technical barrier indicating the maximum of 2007 and the minimum of 2002.

Fixed income

Polish bonds recovered somewhat following the zloty-led correction which pushed yields higher by up to 40 bps last week. On the data front the CPI came in at 3.1% Y/Y, slightly above consensus (3.0% Y/Y) but below the initial FinMin estimate of 3.2% Y/Y. More importantly the upside surprise was due mainly to the higher than expected rise in food prices, while the core component recorded a slight drop, pointing to the direction of markedly lower headline price growth in the months to come. The PLN will be eyed closely ahead of the next barrage of data this week. The numbers (including IP and labor market figures) could reinforce expectations for a rate cut later this month, which would be positive for shorter maturities, which have recently felt the heat as skepticism regarding the pace and scale of further monetary easing mounted with the weakening of the zloty.

The Hungarian bonds stayed broadly unchanged as neither the currency, nor economic data had any major impact. Bonds have lost substantial value in the last two weeks, so market may take a pause for now, unless news about a higher VAT rate changes the inflation perception. We believe inflation will disappoint in the second half of the year, but market may ignore this for now as polls show that inflation-effect is generally underestimated by most economists.

The Czech yield curve flattened in a bearish fashion as the market took into account more seriously that the bottom of the CNB easing cycle is closer. While the market virtually shrugged off better-than-expected GDP figures it paid closer attention to CNB’s Minutes and a presentation of a new inflation projection in a meeting with analysts. Details of the new report and related comments to the projection of Bank Board members showed that some of them do not ignore the currency weakness, which means they will be less willing to cut the official rate deeper aggressively. In this respect, we still forecast the CNB will cut its repo by 25 bps during it March meeting. Today, the market might start to watch more closely at its forex counterpart. Should the koruna extend its weakness, the front end of the curve might react negatively.

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