NBH meeting in the focus today

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Currencies: Czech PM denies the Czech Republic will need foreign aid
Fixed Income: NBH meeting in the focus today

Currencies

The Hungarian forint finished the week in a more positive mood and the currency slipped through the key 300 range and closed the day at 299. The Central bank’s meeting today will be in the spotlight and the market has recently started to guess about the probability of a rate hike in the next 3-6 months. The inflation outlook would still warrant monetary easing, but recent turbulence on the fixed income and the foreign exchange markets could call for a stable base rate at 9.5%. The central bank has also repeatedly emphasized that financial stability is an important concern and therefore maintaining the base rate would not be a big surprise for the market.

Government intervention has proven quite effective so far in stabilizing the Polish currency and while the recent price action is still obviously short of a full recovery, we think the euro’s rebound against the dollar and only moderate downside pressure in core equity markets over the weekend give hope for some calmer trading for the PLN in the hours to come. This said, the EUR/PLN could test the downside at 4.70 early today, which if broken would open the way to gains in the 4.60-4.65 area. On the upside the 4.80 mark will be vital, but one cannot exclude further weakening if the shaky regional sentiment deteriorates again.

The Czech koruna stayed in a wider range around 29.00 EUR/CZK. Although the trading was quite illiquid, the koruna showed resistance in the face of the ongoing sell off on the global equity markets. The miscommunication of PM Topolanek played only a limited role. Mr. Topolánek said on Thursday that the CR might need outside assistance, but took his words back on Friday and denied that the CR will need foreign aid. At the start of the week, trading should be mainly driven by the global risk aversion/appetite theme with some cautious return of risk appetite visible in Asian trading. The situation may also improve a bit as Germany said during weekend it is prepared to use the IMF to help the eastern European countries that are at risk.

Fixed income

Polish bonds were little changed on Friday as the market drew little hope from the stronger zloty. With the strength and sustainability of the currency rebound questionable in the short run the market has priced out the rate cuts largely expected until recently. Indeed, it seems that given the exchange rate volatility and the current ineffectiveness of the interest rate channel, the MPC is quite likely to scale down the pace of policy easing this month to a mere 25 bp cut, even though economic arguments seems compelling for a much deeper reduction. The last piece of domestic data (retail sales and unemployment) will be eyed closely tomorrow ahead of the rate decision on Wednesday, but in the end the prospect of a (deeper) rate cut depends on the zloty and on whether the revised inflation report shows as much softness as we expect it to.

The Hungarian bonds were relatively stable on Friday as a more stable currency gave some support to bonds. The market has accommodated to a significantly worse scenario as yields spiked to levels above we saw in last October, thus further weakness would require some really bad news to come, which can not be ruled out, but probably we can have a relief rally first.

On Friday the Czech bonds eased in poor trading volumes and the yield curve steepened slightly. However, the change of yields was very modest at around 1 bps after January’s PPI showed a 1.1% m/m increased. No important domestic events are released today. Nevertheless, Friday’s rise in yield hat did not correspond to the eurozone development may lead to some correction. But any change should be modest only.

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