The Czech government faces confidence-vote

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Currencies: The Czech government faces confidence-vote
Fixed Income: Czech bonds in wait and see ahead of tomorrows’ auction

Czech Republic

The Czech koruna was losing despite the positive development on the global equity markets. Nevertheless the moves were not dramatic as the pair only came back to the 26.90 EUR/CZK and probably reflected prevailing political uncertainty. Also the worse than expected industrial production figures could have played a role. Industrial production fell y/y by 23.3% in January, after declining by 14.6% in Dec. Production of automobiles, which contributed most to the decline, fell by 36% y/y in January.

Today the main issue is the confidence-vote for the Czech government. We still believe the chances that the government is not confirmed are relatively small. Turncoats and the small parties would not benefit from the early election alternative under current circumstances. If the government survives, the koruna should appreciate it with moderate gains to the 26.50 EUR/CZK area.

The Czech bonds strengthened on Monday and the yield curve steepened after yields at the front end lost up to 9 bps. The non-confidence vote in Parliament prepared for today might play its role. Due to different market development the differences between Czech and German bonds diminished. Today’s retail sales should be another of a weak statistical set. Moreover, the non-confidence vote should also support interest in bonds. However, bond gains could limit portfolio’s adjustments ahead of tomorrow’s auction of the 4.10%/2011 paper in which Ministry of Finance offers bonds for CZK 10 bln.

Hungary

The Prime Minister’s resignation led to a temporary weakening of the Hungarian forint. The forint dropped to 308 in the morning where it turned around and appreciated to 300 by the end of the day. Former central bank Governor Mr Suranyi seems to be the most likely candidate for PM, but he would like to get support from the opposition party Fidesz before taking the job. The Prime Minister will have narrow room to maneuver because the IMF program has to be carried out and this requires some additional spending reduction. We think whoever will be the new PM, the mediumterm outlook will improve for Hungary as the private sector has been increasing savings and the global markets may also recover later this year. The currency is deeply undervalued and has so far missed the recovery of other regional currencies, like the PLN or the CZK. Consequently, if the sentiment improves and the currency high yield levels will start to attract some inflow to the market, we may see significant appreciation of the currency in the next 3-6 months.

The Hungarian bond market didn’t weaken further despite the political uncertainty. This could be a positive sign for the future as market position could be deeply negative for bonds and this morning’s relief rally also suggests that yields may come down from the record high levels in the next months.

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