NBP meeting in focus

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Currencies: CEE currencies extend their stabilization path
Fixed Income: NBP meeting in focus

Currencies

The EUR/PLN pair hovered in a relatively tight range between 4.64 and 4.70 as the Polish FX market switched to wait and see mode on Tuesday. The MPC rate decision will be eyed closely today. We stick to our view that the calmer FX market will be one of the decisive arguments in favour of a 25 cut (more in FI part). This is widely expected and while other CB’s in the region are set to be more hawkish to defend their currencies, the incremental move lower shouldn’t be a strong negative factor for the zloty, especially if, as we expect to, in the policy statement we see more strong wording on the currency.

The Czech koruna stabilized on Thursday. The pair stayed in suspiciously narrow range around 28.30 and posted moderate gains. Rather positive sentiment was supported by the CNB that issued a statement yesterday in reaction to reports in the foreign press that put the Czech Republic in the same basket as the countries of Central and Eastern. On 19 February 2009, the Financial Times published an article called “Scare warns of potential quake ahead”, which included tables of data for selected countries. A table called “Foreign banks’ lending to Czech Rep” states that foreign banks’ loans to the Czech Republic totaled USD 192 billion (around CZK 4 trillion) as of 30 September 2008. The CNB regards this table and also the accompanying text as very misleading. According to the Czech banking statistics, which are in line with international standards, the Czech Republic’s debt vis-à-vis foreign banks is only $38 billion. The second case was a leader in the Economist that mentions the Czech Republic as one of the countries whose “tumbling currency” is causing “agony of households that have mortgages in Swiss francs or euros”. Nevertheless there is no such problem in the Czech Republic and the foreign borrowing of Czech households is a negligible 0.1% of total household borrowing. An editor for The Economist said it was unfortunate of his magazine to include the Czech Republic as a country that has a big share of mortgages in foreign currencies. Today, optimism on the equity markets could help the koruna to extend its gains slightly and to move to the 28.00 EUR/CZK area.

The Hungarian forint had a mixed day as newswires mistranslated the Prime Minister’s speech in Brussels and the message that “we are in deep trouble, indeed” triggered sharp weakening of the currency. The correction came shortly and the speech record was released in Hungarian and this confirmed that the Prime Minister said that “the world is in deep trouble and Europe too, but there is a Hungarian phrase that you get to know who your friend is when you are in trouble”. Later on, the currency recovered to EUR/HUF 299 shortly and stayed there overnight.

Fixed income

Polish bonds traded flat yesterday as all attention already went to the MPC rate call later today. A no-cut decision would in principle be negative for shorter maturities. However, the softer zloty has put the aggressive rate cut expectations under severe pressure, which might help dampen the impact in case rates do stay flat. What is more, a strong statement on the currency can be expected, which may be positive for sentiment in markets in general. This said, while part of the MPC might be concerned with the risk of deeper depreciation if deeper rate cuts are delivered, we think the majority will opt for a slowdown in the pace of easing instead (we, like the market be on a 25 bp cut, and economic evidence seems compelling for even a deeper rate reduction). At the same time, the risk indeed seems to be that the Council will decide to stay on hold this month, if only to be consistent with the recent verbal intervention to defend the currency.

The Czech yield curve flattened as the short end of the curve still negatively digested previous comments of Czech central bankers that indicated that the next step for the monetary policy should be a rate hike and not a cut. We think that it is far from clear what the next step will be – at this moment we definitely rule out a possibility of rate hike, while we still bet on one more 25 bps rate cut in the second quarter or latter on.Today, the Czech market might look for inspiration to Poland, where the MPC will probably change official rate. Should the NBP cut its rate by 50 bps as we expect this might bring some temporary hope for the short end of the Czech curve too. But a necessary condition is a stable currency, if the Polish rate cut triggers further currency weakness there will be no gains for Czech bonds.

The Hungarian bond was relatively stable and demand for the 3-months T-Bill auction was strong, but cut-off yield rose to 11% also confirming expectations about a rate hike. The FRA curve is still looking for around 75bp higher repo rate in the next 3-6 months and this seems possible as the market is demanding double-digit interest rates from forint denominated assets.

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