Croatia's credit rating cut by S&P

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Currencies: Croatia’s credit rating cut by S&P
Fixed Income: Czech bond market is awaiting a crucial 10Y bond auction

Currencies

The Hungarian forint started the week in a stable mode and the pair remained within the close range of 295 and 298. The market should be in a correction mode after last week’s massive rally, but the positive global equity market sentiment limited the weakening. The week is light on the macro data front and the next central bank meeting is scheduled for next Monday, so the market may remain unaffected by these.

The zloty extended last week’s gains on Monday in the wake of the strong equity market performance. The EUR/PLN pair inched markedly lower, past 4.50 and headed gradually toward the 4.40-4.42 area. Even though end-of day profit taking pushed the pair back to 4.45, the zloty managed to work out decent gains throughout the session. Today the overnight corrective action in core equity markets suggests the zloty could find it difficult to build on the recent gains and that it may in turn consolidate around current levels in the 4.40-4.50 range. The next batch of domestic macro data (more in FI part) will be of lesser importance trading-wise, although this has been the case for some time now.

Fixed income

Czech bonds lost ground in fair trading volumes. The yield curve flattened with the long end up 5 bps. The decrease in production prices was as expected, however, the koruna slightly easing and portfolio trimming ahead of tomorrow auction could initiate the bond prices slip. Mr. Holman’ comments (CNB Board member) that interest rates might move in both direction could hardly influence the market. No fresh statistics are released today. The market could be quiet a day ahead of a new 10-year paper auction. However, the development on the Czech stock market could return investors back to bonds. Still we do not expect significant changes.

Hungarian bonds continued to perform well and yields lowered another 10-20bps during the day. The 5y5y forward spread has narrowed to 340bps, so the current rally seems to be more driven by improving long-term expectations, which is different from the rally we had in January. That time, rate cut expectations were lowering the curve through the short-end, while the long-end forward spread widened and eventually this proved to be unsustainable some weeks later, when the market collapsed.

Polish bonds traded higher in prices on Monday as the market continued to look to the zloty for inspiration. The T-bill auction was successful as expected - roughly PLN 2.7 bn worth of 26 and 52 week bills were sold with the combined demand at 7.7 bn at fairly low yields. Liquidity is in the interbank market it seems, as the NBP’s strategy to leave it there via a large reduction in NBP bill issuance has started to work. This bodes well for the short end of the bond curve in the foreseeable future, if only rate cuts do materialize in the scale that we expect them to (additional 100 bp this year). Regarding today’s trading the February wage and employment numbers will get some attention. We are looking for a 5% y/y rise in wages, with the risks skewed to the downside as the economic slowdown progressed last month. At the same time we expect annual employment growth dipped into negative territory (-0.5% y/y) for the first time in this cycle. Both numbers are likely to be bond-positive, although in a broader perspective, the market will probably continue look at the zloty rather than data for ST guidance.

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