Czech koruna decoupled from zloty and forint and firmed

next report will resume on march 04

Headlines

Currencies: Czech koruna decoupled from zloty and forint and firmed
Fixed Income: EBRD and EIB prepare rescue package for Eastern Europe

Currencies

The Czech koruna benefited from CNB’s written and verbal defence of the position of the Czech economy, which was put by foreign financial media (FT, the Economist, WSJ) in the same basket with leveraged economies like Latvia and Hungary based on wrong external debt statistics. Hence, the koruna decoupled from the forint and the zloty and gained almost 2 % against the euro.
Slightly better sentiment in the Czech forex market might temporary prevail as there are two positive news items. First, the local press informs that because of increased demand in such countries as Germany, France and Austria, Škoda Auto is returning to a five-day work weeks after one month of four-day production. Also, Hyundai is considering making cars on Saturdays. The increased demand for small cars is mainly due to the scrap subsidies launched in nine countries. Another temporary positive factor for all CE currencies might the plans that EBRD and EIB consider to lend up to EUR 25 bn to Eastern Europe, which supports regional banking systems.

The Polish zloty traded around EUR/PLN 4.70 in a surprisingly calm fashion on Thursday. Moody’s and S&P came out yesterday and indicated that while the economic environment had indeed deteriorated more than expected, a rating downgrade was not on the table in the foreseeable future. Fiscal issues will be decisive in this respect we think, as the coming months will be a test for the government’s determination to keep the deficit under control as the economy could head from severe slowdown into recession. In the short run, the global sentiment seems to be the decisive driver for regional currencies at this stage and we think the PLN will closely follow equity markets heading into the weekend.

The Hungarian forint had another quiet day hovering around the key 300 level. EU Commission chief Barroso cooled down expectations about a quick euro adoption as he said that the country needs to do its job like others for that. Government has been frequently talking about entering the ERM-2 system this year, but we think this issue is just used a marketing tool to help the currency rather than a real option given the serious external debt problem of Hungary.
World Bank, EBRD and EIB will offer €24.5B in financing for struggling banks in Eastern Europe and some of their customers. This might support the forint at the onset of trading.

Fixed income

Polish bonds traded flat across the curve in calm market conditions as the zloty leveled off yesterday. The market ignored the full version of the inflation projection, as the gist of the report was already divulged by the MPC yesterday. The growth trajectory in 2009 (1.1% y/y) is in-line with current market expectations and while the outlook for 2010 and 2011 (2.2% and 3.7% y/y respectively) looks optimistic, the drop in inflation in the long term leaves no doubt as to the economic rationale behind the easing stance which remains in place. The CPI is set to stay above the 2.5% y/y target (but within the target range) for longer, i.e. until Q1 2010, but is seen dropping to below 1.0% y/y in 2011. This only confirms that were it not for the weak zloty, the February rate cut would have been much more aggressive. We think the MPC may stay on hold in March and is likely to consider other means of tunneling credit into the economy - a reduction of the minimum reserve requirement or the deposit rate are on the table. Open market operations have already been curtailed pushing short term market rates below the reference rate last week. Regarding trading, the MinFin’s February inflation estimate will be the eye catcher on Monday – we were looking for a slight drop in the headline CPI from 3.2% in January, but the weakening zloty puts the risks to the upside, so the reading could be short term negative for bonds early next week.

The Hungarian bond market was also stable, like the day before. The 5y5y forward spread remained unchanged slightly below the 400bp level, which is still very wide, but it is tad below the record we saw last week, suggesting that the long-term outlook has also recovered a bit.

The Czech bonds were under pressure and the yield curve steepened on Thursday. Nevertheless the volumes were very low and only the mid-curve attracted more attention. Negative news from the construction sector as well as the comments by vicegovernor Hampl in Financial Times was widely ignored.
Today is without any significant domestic news and the Czech bonds should track the sentiment on the neighboring German market.

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