CEE currencies recoup some of their losses

Headlines

Currencies: CEE currencies recoup some of their losses
Fixed Income: Czech Vice-governor Singer in favour of rate hike

Currencies

The Czech koruna together with the region remained under strong pressure and jumped to 29.69 EUR / CZK. The sell off was mainly driven by the news that risk are for a rating downgrade of the banking groups in the region. Beside that the koruna also did not feel comfortable with the gloomy prospects of the global equity market. Today, the sentiment may improve a bit. The koruna could profit from surprisingly hawkish comments by Governor Singer as well as from the commitment of Polish Ministry of Finance to help the zloty. Nevertheless we are cautious about the longerterm rally and we believe the optimism might be rather short-lived.

Following the weak opening of the session the Polish zloty traded flat near 5 year lows against the euro on Tuesday. Volatility remains elevated and it seems trading will be nervous as the EUR/PLN risks heading toward the psychological 5.0 mark. The market was unimpressed when PM Donald Tusk came out yesterday and said that the government would start exchanging EU funds directly in the market at EUR/PLN 5.0. The zloty inched higher for a brief moment, only to fall back to daily lows against the common currency later in the day. While we had argued that given the weak liquidity and the likely speculative nature of the PLN’s weakening could be an effective measure to stabilize (or even strengthen) the currency, the impression is that the verbal intervention might prove counterproductive in the very short run. The coming hours might show whether the market wants to put the PM’s determination to a test. We think it would have been a better idea to start intervening in the market without notice and without a specific exchange rate target in mind, simply to make speculation against the zloty more risky (costly) for the parties involved.

Fixed income

Polish bonds failed to hold up to the pressure from the weakening zloty yesterday as yields shot higher by another 20 bps across the curve. The stronger than expected wage growth (8.1% Y/Y) were dubbed a one off, due to tax-related time shifts in the payment of salaries. Employment growth slipped from 2.3% Y/Y in December to 0.7% Y/Y in January, pointing to the extreme weakness in the labor market up ahead. Regarding today’s trading the zloty will again be eyed closely.

The CNB strikes back. Facing the very weak koruna, CNB Vice Governor Singer (a well-known activist in the Board) said in today’s economic newspaper E15 that an interest rate cut is completely off the table given the current exchange rate level. What is even more influential, Singer added that the question instead is whether to raise interest rates and by how much. It is quite clear that this 180° turnaround is caused by the exchange – the central expected that the average EUR/CZK rate would be 25.80 and definitely it will not happen. So there might be fears that overall monetary conditions will be too eased. Another factor, such strong comments could hedge positions of Czech exporters, which have now due to weaker currency big losses in their books. So where does Singer’s comment leave us? We now think that easing cycle is probably over in the Czech Republic, which will have serious market consequences – the yield curve must steepen in a bearish fashion. It will be a theme for the market for next several sessions. However today there will be another important factor for the market. The finance ministry will issue 8-year floating-rate bond in planned volume of CZK 10 mln. As it is the first this year’s auction we believe that could produced a solid demand. Nevertheless, the question is what will be the pricing and which bids the FinMin will be ready to accept. We believe that Finance Ministry won’t accept all bids but most of the issue will be sold.

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