Czech MinFin tests the market appetite with auction 8Y floater

Headlines

Currencies: CE currencies might benefit from Romania’s decision to ask IMF for help
Fixed Income: Czech MinFin tests the market appetite with auction 8Y floater

Currencies

The negative global backdrop kept the Hungarian forint in the weakening mode and the pair reached the 308 level against euro, close to the historic high of 310. The Prime Minister sent another verbal intervention signal by saying that if the forint remains around current levels, it would have negative consequences. The Parliament accepted a law that will allow the central bank to issue bonds, which could be used to recapitalize banks if needed. The Central bank may have to do this since the government is hardly able to issue bonds on the market.

Despite the persisting vulnerability of the zloty in the tight liquidity conditions the market seems to have calmed down a bit over the last while. The EUR/PLN is locked in a relatively tight range between 3.70 - 3.80 and while in recent days the upper bound of the band had been tested several times, the strong performance in Asian stock markets suggests some upside could be in store for the PLN today.

The Czech koruna continued to decouple slowly from the rest of the region as it extended its recent gains. Hence, the EUR/CZK pair was able to settle just close to the 28.0 level or to its three week lows, as investors probably began to differentiate a bit among Eastern European economies and took into account better Czech fundamentals. Today, however, the koruna might again join the regional sentiment, which could be (at least temporary) lifted by Romania’s decision to ask the IMF for help.

Fixed income

The Hungarian bond market saw yields rising some 5-10bps with the weaker currency as usual, while the auction of the 3-months T-Bill received substantial demand. Strong demand may however not be a positive sign for the market as investors trying to shorten the duration of their portfolio could try to buy short-term maturity securities, which may keep the long-end under pressure to weaken further. Currently the 3- and 5-year bonds are trading around yield levels we saw last October, while 10- and 15- year bonds are offering higher yields. Therefore market may be negative about the long-term outlook, which does not paint a positive outlook for the short-term bonds either. The money market is still looking for a rate hike, while the central bank does not show any willingness to follow those expectations and this may also keep real money investors away from forint bonds.

Polish bonds traded flat yesterday after being hit earlier this weak by the weaker zloty and the higher than expected FinMin inflation estimate. The Ministry expects headline CPI to have come in-line with our expectations at 3.4% y/y, up from 3.1% y/y in December, largely due to the rise in fuel prices. Market estimates ranged from 2.9% y/y to 3.6% y/y, with the preliminary pre FinMin consensus at 3.2% y/y. We think that while the data from the real economy for January could be even worse than the already dismal December figures, the MPC may stay on hold in March to asses the impact of the action so far. Other measures of improving interbank market liquidity to stimulate bank lending (a reduction of the minimum reserve requirement or the deposit rate are on the table) may be considered instead.

The Czech yield curve steepened in low volumes on Tuesday. The market was probably in wait and see mode ahead of today’s auction. The ministry of finance offers 8 billion of 8-year floaters. After the bad outcome of the last auction this is going to be seen as a test how ready the market is to absorb new auction. We do not expect a strong demand as there is going to be also additional 3-year auction till the end of the month.

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