Czech currency slightly recovers

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Currencies: Czech currency slightly recovers
Fixed Income: CNB leaves official rate unchanged, sees room for further easing

Czech Republic

The Czech koruna rebound a bit yesterday. The positive price action could be rather related to a market correction after Tuesday’s successful non-confidence vote than to an outcome of the central bank meeting. Recall that the CNB left its official rate unchanged, while governor Tuma sounded quite satisfied with exchange rate development as the koruna is now closer to the level, which uses the CNB forecasting model (25.80).

Today, the regional calendar is empty so the koruna might look to core markets for inspiration, while domestic political scene could also grab some minor attention. In this respect it is good to know that President Klaus accepted the resignation of the Topolánek cabinet yesterday and said that he will appoint anyone as premier who brings him the signatures of 101 MPs (from 200). This will be, however, extremely difficult. In our view, if political debate about new government will last weeks or even months sentiment in the Czech forex market might deteriorate further.

The Czech National Bank met expectations yesterday and did not change rates at its second meeting of this year. All six CNB Board Members present, voted in favour of leaving rates unchanged. In the next period, the CNB primarily sees inflation development risks in the significant economic downturn, the rise in unemployment, as well as in inflation and the interest rates in the euro area. Another risk is the development of the exchange rate of the koruna, which, according to the Governor, is close to the level which the central bank envisages in its forecast. Monitored inflation also involves a risk. Regarding this, we can add that February’s inflation was 0.5% above the CNB forecast, but overall inflation risks are well balanced at the moment.

Probably the most important conclusion from the central bank’s press conference is the Governor’s statement that the risks for interest rates are on the downside. This is consistent with our scenario, which envisages another rate cut, this time the last one, and probably by only 25 bps. Latitude for a rate cut is provided by the ever-increasing risk of economic recession, a favourable inflation outlook and, above all, further monetary easing in the euro area.

As concern the market reaction – as expected it was quite calm. Nevertheless we think that the market will digest a bit dovish stance of the central bank latter on and it will start to price in another rate cut. The necessary condition for that is, however, the exchange rate stability.

Hungary

The Hungarian forint weakened to 304 after Mr Suranyi did not accept the offer to become the new PM. Socialists said that they will try to find someone else acceptable for the Free Democrats, but this seems difficult and thus early elections are getting more likely. The forint could remain weak because of the political uncertainty, but the loss could be limited if central bank repeats it strong rhetoric about a possible rate hike due to the currency weakness we saw in the last statement.

The Hungarian bond market had a quiet day again and yields remained broadly unchanged, though they are expected to increase today with the currency weakening. Foreign bond holding is relatively stable around Ft2400bn and this was the bottom level during the October crisis, so lack of supply may limit the loss now as well. The short-end is more vulnerable due to the risk of a rate hike and after rallying almost 200bps since the debt management agency announced buybacks, there could also be room for an increase.

Poland

The Polish zloty stayed in the very tight range around 4.56 EUR/PLN on Thursday. The pair ignored gains on equity markets as well as IMF deal with Serbia and final deal with Romania. There were some further interesting comments from central bankers on Thursday. Key swing voters including Jan Czekaj signaled there could be pause in interest rate cuts in April. Marian Noga even pointed that the 2009 growth could slightly top analyst’s forecasts.

For today we remain cautious. The zloty does not seem to appreciate the gains of global equity markets and is locked by the regional political instability. Hence we do not expect the pair to get far from the current tight range below 4.60 EUR/PLN.

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