Czech bonds eye tomorrow's 8-year floater

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Currencies: Regional currencies reach new historical lows
Fixed Income: Czech bonds eye tomorrow’s 8-year floater

Currencies

The Polish zloty collapsed yesterday as the EUR/PLN pair shot higher from 4.65 in early trade to 4.85 late in the day. Risk aversion and speculative action are at play and the zloty is now well on the way to testing 5 year lows against the euro (in the EUR/PLN 4.90-5.00 area). Market liquidity has virtually dried up which only aggravates the price action. Several MPC members including NBP president Skrzypek and MPC moderate Sławiński have come out saying the zloty was heavily undervalued (20-25% above parity we think). At the same time, the NBP issued its long awaited cost-and-benefit of entering the EMU report yesterday, in which it suggested that economic arguments pointed against ERM-2 entry in the current volatile market conditions. While in principle, we agree that it would be a risky move, it seems that any piece of bad (or even neutral) news will be used against the PLN in the current circumstances. Government intervention could prove effective at this stage, although we have seen no new signals that the FinMin is contemplating such a move at any specific EUR/PLN level. As such it seems more weakness seems the most likely scenario in the very short run.

The Hungarian forint started this week in a bearish mode, despite government and the IMF efforts to shed a more positive light on the medium-term outlook of the economy. The government announced the tax restructuring program and some Ft200bn spending cut in order to keep the budget deficit on an improving track. This however is not enough to keep the deficit target at 2.6% and they revised this to 2.7-2.9% of GDP. The IMF carried out the first assessment yesterday and said that Hungary met all criteria, which will allow the country to call for the next tranche of the €20bn program. The forint however collapsed overnight with the Polish fellow and the pair hit a new low of 309.50 this morning. Central bank governor said yesterday evening that the forint volatility is harmful and that they will take into account this into the next rate decision. This could mean that central bank will maintain the base rate at 9.5%, but we doubt this can matter much.

The increase in the risk aversion following the publication of reports on the decline in the Japanese economy hit indiscriminately all Central European currencies. The Czech koruna broke the key technical barrier at 28.80 EUR / CZK and reached up to 29.24 EUR / CZK, which is a three-year low. The pair more or less ignored reports that the Government approved the incentive package to support the economy. Today the Czech retail sales should hardly have any effect on the koruna. In our opinion, the nervousness should persist today. Plans to restructure the American automobile manufacturers do not seem to bring much optimism. A Moody´s report that the recession in Central and Eastern Europe may lead rating downgrades across the regional banking system is a negative factor, too. We expect further losses of the koruna today. After breaking 28.80 EUR/CZK, the technical picture indicates the risk for further significant losses as far as 32.40 EUR / CZK.

Fixed income

Polish bonds followed the zloty lower in prices yesterday and even though the calendar heats up today with the labor market numbers (wages and employment) the currency should be the leading factor for the FI market across the curve. Hence the (most likely) soft data may not be enough to give the market much respite if the zloty heads toward EUR/PLN 5.0 today.

The Hungarian bonds followed the currency and weakened again with yields now at the record high levels we last saw in October. The 5y5y spread widened to a record high level of 400bps, suggesting that the country has lost the credibility of convergence. We think extraordinary rate hike could be needed to stabilize the currency, which is the main source of concern for bond holders. However, central bank seems to be rather dovish and has fallen behind the curve as money market traders have started to price in the probability of a rate hike, while the central bank has been suggesting the end of the easing cycle.

Trading volumes on the Czech bond market were below the average, indicating that investors were not very active at the Czech bond market. Yields showed no large fluctuations. Only the short end of the curve corrected the Friday losses and moved downwards. Today we do not expect any significant domestic events. We believe that ahead of tomorrow’s auction of 8-year floater a wait-and-see approach will prevail.

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