Extraordinary central bank meeting after forint sank to 317/€

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Currencies: Extraordinary central bank meeting after forint sank to 317/€
Fixed Income: Czech CPI expected to decline further

Currencies

The Hungarian forint finished the week in a positive mode after the central bank announced to hold an extraordinary meeting over the weekend. The Council released a statement emphasizing that the economy has been adjusting to a higher savings level, but more importantly they said that they are ready to use all the tools to curb the excessive weakening of the forint. Similarly to the Polish practice, they will convert some €1bn annual foreign currency income on the market into the forint, which may help the external financing structure, but ‘all tools’ could also mean that a rate hike may come. The money market has been looking for rate hikes for many weeks, but the central bank has refrained from admitting that they may have to take back some of the 200bp easing that took place between November and January. The forint recovered to 312/€ after a new all-time record low of 317/€ has been set in the morning session. Market may welcome the extra help from EU funds, but this recovery may be challenged later if the rate hike debate continuous.

The Polish zloty made an impressive comeback below EUR/PLN 4.70 on Friday on client orders, only to rise back above the pair’s crucial support level in a profit taking move late in the day. While the ST sentiment in the FX market seems to have improved up to a point where further strengthening of the PLN (to the 4.60-4.65 area or even beyond) cannot be excluded in the days to come, we stick to a cautious stance in the longer run as market liquidity remains low and excessive price volatility could easily return. Early today the PLN might draw support from the words of NBP president Sławomir Skrzypek, who indicated that again that the zloty was significantly undervalued and hinted on the (we think, all-in-all unlikely) possibility of FX interventions by the central bank.

The Czech koruna remained surprisingly resilient to further spike in risk aversion in the US session after the release of the gloomy payrolls report. Nevertheless the volumes were very low and it is difficult to make any strong conclusions from the move back to the 27.50 EUR/CZK area. We believe the regional sentiment might be slightly positive at the beginning of the session. The koruna may appreciate the supporting comments from the Polish and Hungarian central banks. Beside that also the domestic figures can attract some attention. We believe the trade balance may come out slightly better than expected, which could help further. Nevertheless there is no reason to be strongly optimistic till the global risk aversion and the uncertainty about US Geithner´s plan are in place.

Fixed income

The Hungarian bond market closed the week with a bit of relief with the currency, but yields are at record high levels. The 3-year bond is trading at 14% yield level and long-term bonds are also at record highs of about 11%. Trading is choppy as many primary dealers have stopped trading due to massive losses on positions. Half of trading meant that end of the bear market last October, so it will be interesting to see whether this could also be the case now.

Polish bonds suffered massively as local equities soared following the weak opening on Friday. The curve was up by up to 10 bps (for longer maturities), in a move we think had little to do with fundamentals, particularly at the short end of the curve. The 2Y benchmark is currently traded at 5.97% while the NBP reference rate stands at 4.0% and is set to drop to 3.0-3.5% in the next half-year. On top of this the very short end of the curve has been suppressed by excess liquidity which has remained in the market after the NBP curbed the scale of its open market liquidity operations (7 day NBP bill issuances). For example the WIBOR O/N averaged at 3.12 last week standing is in stark contrast with both the reference rate and the return on even the safest class of 52W government T-bills at 4.88%. This said, while the room for a drop in yields may be limited for longer maturities due to rising uncertainty regarding the fiscal outlook, we think the short end of the bond curve will offer ample potential once liquidity conditions improve in global markets.

The Czech bond yield curve with thin trading volumes flattened on Friday. The market might be frightened by previous currency weakening with reviving possibilities that CNB could increase rates. As a result the short end of the curve ended up by 5.5 bps. CPI released today should show another decline. This together with strengthening of the domestic currency later on Friday and additional reaction to American statistics may correct previous yield gains.

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