Czech banking sector is in good shape according to CNB

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Currencies: CEE currencies gain on increased risk appetite
Fixed Income: Czech banking sector is in good shape according to CNB

Currencies

The Czech koruna tracked the regional, as well as global, optimism on Tuesday. The gains on equity markets helped the koruna below 27.00 EUR/CZK at least for a while. Today we believe in the possibility of a minor correction. The pair should stay in wait and see mode above 27.00 until any stronger impetus from the global markets comes. This morning, investors may dig into the details of fourth quarter GDP. The comments made by central bank governor Singer might play a slightly supportive role for the koruna during the session. Singer said that the present state of Czech banks is such that they would likely be the last to cause trouble in the crisis. GDP would probably have to fall by a double-digit figure for the banks to have difficulties, he said. He expects much bigger problems in the areas of unemployment and industry. The CNB has mapped out the potentially risky investments by banks, and he said he is convinced that there are no other surprises like the Icelandic bonds. He added that the parents of most Czech banks are a “reputational hazard.”

The wave of optimism that engulfed global equity markets yesterday following news on the results of Citi was obviously positive for the zloty. EUR/PLN edged below 4.70 already in the morning after the NBH indicated it would be ready to intervene in the FX market to defend the forint. The pair then headed further south to end the day trading in the EUR/PLN 4.66 area on the back of rising stock markets. While the improvement in sentiment may be appreciated, we doubt whether the PLN will switch to outright strengthening mode at least until improvement is seen in the global fundamental outlook. While one could argue that the turning point may not be far away, we have the impression it’s still too early to make the call. The market has however calmed down markedly, both in terms of direction (the PLN is no longer depreciating) and to a lesser extent also intraday volatility. We would look for more range trade with some upside potential for the zloty if the regional sentiment continues to improve in the days to come.

The central bank’s verbal intervention intensified yesterday and this helped the Hungarian forint to appreciate further. The pair recovered to 305 during the day, some 2% stronger than Friday’s close of 311. The governor said that the central bank is active on the market via intervention. This could be good news for the market for now, but we doubt whether it could bring a long-term solution unless investors’ demand for a higher risk premia on forint assets declines back to earlier levels.

Fixed income

On Tuesday the Czech yield curve, with very thick trading volumes flattened. Its gains at the short end climbed near to 9 bps. As domestic scene had no important incentives, stock market and development on EMU bond markets influenced also the Czech one. No important domestic events are on agenda today. Final GDP figures and CNB vice governor Mr.Singer about stability of Czech banks could hardly have any influence. Therefore the Czech bonds could look for inspiration to neighbouring EMU markets again.

Polish bonds were surprisingly quick to react to the stronger zloty yesterday as the long end of the curve dropped by 8-10 bps throughout the day. Today the switch tender will be the ultimate eye catcher and its results could indicate whether the rise in risk appetite was sustainable. 2 and 5Y benchmarks will be put on offer in return for respective bonds maturing this year. Given the relatively elevated yield levels we think the auction is likely to be a success which should be positive for bonds in the secondary market as well. Further out in time, investors will already look toward the first relevant macro release this month, which is the CPI on Friday.

The Hungarian bonds continued to rally with the currency and yields lowered by about 20bps. The inflation data today will be in the focus and the consensus is looking for around 3% Y/Y reading, which would generally be in line with the expected inflation path.

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