Hungarian inflation higher than expected

Headlines

Currencies: The Czech koruna ignored downward revision of GDP
Fixed Income: Hungarian inflation higher than expected

Currencies

The Czech currency shrugged off a downward revision of GDP figures, and the EUR/CZK still hovered close to the 27.0 figure. Recall that the Office revised the final GDP growth figure for 2008 down to 3.1%, compared to the preliminary figure of 3.5%. The economy contracted by 0.9% q/q in the fourth quarter of 2008 down from a preliminary figure of -0.6%. For us, the released figures are not surprising – we still estimate a 2% contraction for the Czech economy in 2009. Today, the domestic calendar is empty, so the korunas will watch the forint and particularly the zloty for its direction.

The Polish zloty extended this week’s gains into the EUR/PLN 4.58-4.60 area on the back of the renewed global optimism on Wednesday, only to fall back above 4.60 late in the session as core equity markets leveled off. The PLN was unimpressed by Fin- Min Jacek Rostowski who indicated that Poland still aimed at ERM-2 entry in H1 this year, as was written down in the official road map to the euro in 2012. While hard action would no doubt be positive for the currency (early ERM-2 entry for example), it seems the market has become immune to even the most optimistic talk regarding the time-frame. Instead, investors remain (rightly) skeptical on the prospect of EMU entry in 2012. At the same time though, as long as it’s the conditions of financial markets that bar Poland from ERM-2 entry and not weaker domestic fundamentals, it should make little difference for the PLN if EMU accession takes with a slight (i.e. one year) delay. Regarding the outlook for today, equity markets will lead the way for the zloty. The PLN might give away some of this week’s gains following the softer performance in Asia, but may return to strengthening mode if only optimism returns to markets before the start of the US session.

Fixed income

The Czech bond market, in relatively liquid trading, tracked the losses of the German bund, at least in case of longer maturities. The shorter end of the curve remained more stable, mainly thanks to the strong Czech koruna. Today is without any significant domestic events and hence we bet on a cautious correction of the recent losses on the long end of the curve. Nevertheless the new prognosis by the Czech ministry of Finance, which is pointing to zero growth in optimistic scenario and 2% decline in the pessimistic one, may prevent the bonds from any long-lived optimism.

Polish bonds tracked the zloty higher in prices yesterday after the switch tender went reasonably well and as the market geared up for the barrage of eco data (including CPI) due out tomorrow. The eco numbers will be relevant for shorter maturities, which have been more resilient to the strengthening of the zloty recently, while for longer maturities the sentiment in the market should remain driven by the currency.

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