Profit taking on CEE currencies

Headlines

Currencies: Profit taking on CEE currencies
Fixed Income: Czech FinMin hopes to issue retail government bonds up to CZK 140bn

Currencies

The Hungarian forint rally seems to have run out of steam on Friday and the pair began a correction from 293 to 298 during the day. The market has basically priced in almost all the good news for now, these incorporate some €2.4bn inflow from EU funds from the central bank, possibility of a rate hike, wider FX-swap points, the second €2bn tranche from the EU loan and the ‘bear market rally’ on global equity markets. The correction could be the theme for this week and market may also shift focus on the upcoming central bank meeting next week. Given that the market has been gauging about rate hikes, it will be interesting to see the stance of the Monetary Council and their willingness to do such a move during a deep recession.

Much better sentiment in Central Europe helped the Czech currency allowing it to consolidate its gains at eight-week highs. The C/A figures, which were worse than expected (CZK 1.5bn deficit, while the market expected surplus) had no impact on the market. So, the EURCZK pair was able to finish the week at 26.39. Today, the domestic calendar contains the February PPI figures, but it won’t be a market mover for the koruna. The currency will rather watch the HUF and the PLN, to see whether they are able to extend their rally.

Pre-weekend profit taking was the main theme for the zloty throughout most of the trading day on Friday. The EUR/PLN edged back above 4.50 by mid afternoon, only to recover almost fully after the start of the US session. The reversal rally currently in place could continue this week, although its strength will be dependent purely on the strength in the rebound in global risk appetite. Equity markets will be eyed closely in this respect.

Fixed income

Hungarian bonds finished the week with a mixed feeling as the weak forint is raising concerns again, while the debt management agency announced that they may buy back more bonds. More buyback would mean that the market could become more liquid and trapped positions could be eliminated quicker. However, bonds are still seen risky after the recent volatility, so most players could stay on the sideline for some time to see where things would calm down. If they do so in the coming weeks, high yield may attract some more attention, but we see risk of inflation returning given the very weak currency and this could pose additional risk for early buyers.

On Friday the Czech yield curve flattened. The long end of the yield curve lost over 2 bps and was influenced by portfolios trimming ahead of this week’s 10-year paper auction. On the contrary current account deficit had no impact on the market. The Czech finance minister Mr. M. Kalousek said during the weekend that he hopes that issuing up to CZK 140bn in retail government bonds in the coming years will motivate commercial banks to earn their money on something other than bank fees. The first such issue might be prepared by the end of 2009, so the market should rather focus on the impact of the upcoming action (on Wednesday). The February PPI released today could hardly influence the market like the opposition’s estimates that this year’s GDP could lose up to 5%. The market, particularly the front end of the curve, might rather focus on the strengthening koruna, because it erases the hawkish talk, which we heard from the CNB three weeks ago.

Polish bonds followed the EUR/PLN lower in yields on Friday as the market ignored barrage of macro data, including the all-important CPI numbers. Headline inflation came in at 3.3% y/y, up from a revised 2.8% y/y in January. The annual figure was spot on the market consensus although the m/m dynamics (0.9%) came in visibly above expectations. If not for the new 2009 CPI basket (hence the revision of the January figures), inflation in February would have reached 3.6% y/y. Looking into the structure there was no major surprise. Fuel and food prices were the main driver behind the rise in the headline CPI. We think the February rise in inflation can be seen as a one-off and we expect the headline CPI will head below 3.0% by mid 2009, which in turn will make the case for more monetary easing from the MPC. The fate of the March 25 bp rate cut lays largely in the hands of the zloty though. If the PLN manages to keep its composure at current levels or strengthens further, the Council will probably go forward with the cut already this month. Regarding trading in the coming days, the T-Bill auction today will get ample attention as well, along with the IP numbers due out later in the week. The long end of the curve will remain sensitive to shifts in global risk appetite and is hence likely to keep following the zloty this week.

•   Download Full Central European Daily