Czech parties agree on a technocratic government

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Currencies: Czech parties agree on a technocratic government
Fixed Income: According Czech FinMin the budget deficit might reach 4 % of GDP

Czech Republic

The Czech koruna remained in relatively tight range as uncertainty ahead the US payrolls report kept the market quiet on Friday. Hence, the EUR/CZK pair just hovered above the 26.45 level. This week starts with the February foreign trade report, which showed a surprisingly strong surplus of CZK 8.7bn (the market expected jut CZK 5bn). We believe the outcome of the March report could be even more positive as the scrab subsidy in Germany lifted car production of Czech plants. The market could be also positively affected by developments on the domestic political scene as the coalition parties and Social Democrats agreed last night that Director Jan Fischer of the Statistical Office will become PM of a technocratic government, effective from May 9. Early elections will be held on Oct. 9-10. We consider this as good news which might support the koruna in coming days.

The Czech yield curve continued to steepen as yields at the long end of the curve moved up by around 14 bps. The price action basically reflected a bearish development in core bond markets. We think that the bearish environment in the medium and long segment of the curve could remain even today, because of a pessimistic picture of fiscal situation, which was painted by Deputy Finance Minister Eduard Janota. He said yesterday that the CR will post a budget deficit this year of Kč 120-130bn, or 4% of GDP. Tax receipts had a shortfall of Kč 30bn in the first quarter. Hence it is quite clear that the Czech Republic will not meet the Maastricht criteria this year. On the other hand, the front end of the curve might be more stable, because it might be supported by the stronger currency.

Hungary

The Hungarian forint had a mild correction on Friday and the EUR/HUF pair moved from 293 to 297 during the day before closing at 294. Free Democrats and Socialists supported almost unanimously the new PM candidate Mr Bajnai over the weekend. These two parties have the majority in Parliament. The Parliament may vote on the new government next week, probably on the 15th of April and from that moment, the government may start to work on the details of the large scale austerity package. High yields together with fiscal consolidation may help the forint over the mediumterm, thus any correction towards the 300 level could be a buying opportunity, in our view.

The Hungarian bond market finished the week in a positive tone and yields lowered another 20bps during the day. This indicates that there is no bond yield above 12% and the 10-year point has narrowed the 11% level. The 5y5y forward IRS spread also compressed significantly and the current level around 330bps is way below the recent historic high of 440bps. Inflation risks are looming though, so while the long-end may be more attractive on the fiscal consolidation news, the shorter-end could remain shaky in the coming days.

Poland

The Polish zloty trimmed some of the post G20 gains on Friday due to nervousness ahead of the US payrolls report. Although the zloty kept solid, 5% weekly gains, investors were clearly more cautious at the end of the week. Many market participants are afraid that the recent rise in risk aversion is too fragile and that the regional sentiment can change quite quickly. Especially taken into account the political turmoil and growing reliance on the IMF funding in the region. Nevertheless the zloty should clearly outperform its regional counterparts as it does not need to ask the IMF for help and Poland has a fairly stable government. Beside that, the zloty has strongly outperformed the Czech koruna during the major sell off in February. From a technical point of view, it may be difficult to break below the EUR/PLN 4.40 level, but if the zloty succeeds, the doors to 4.20 may be opened for a while.

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