The Czech curve steepens further due to political uncertainty

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Currencies: Profit taking on the CEE FX market triggered by weaker equities
Fixed Income: The Czech curve steepens further due to political uncertainty

Czech Republic

The Czech currency lost some ground yesterday on the back of more negative sentiment in equity markets. This is another indication that the koruna behaves exactly in line with other merging market currencies. As the domestic calendar is empty today, the Czech koruna will have to watch at other market for some inspiration. The domestic political agenda is also less interesting for the koruna, since it is almost sure that the Lower house parliament will submit a draft, one-sentence constitutional law for ending the term of the current election period by Oct. 15, which will clear the way for early elections.

The Czech yield curve, extended its steeping as short-term yields dropped slightly, while the long end of the curve still suffers from poor demand, which reflects market doubts about a future fiscal situation. Recall that the opposition Social Democrats (the leading party in the Polls) form their pre-election agenda now, which looks really expansionary.

Today’s session started surprisingly with a release of the March unemployment figure, which was published a day earlier than it had been scheduled. The March unemployment rate reached 7.7 %, which is a bit higher than the market expected. This could be some temporary relief for the market – at least for the short and medium segment of the curve.

Poland

The Polish zloty led the regional losses yesterday. Profit taking emerged after the global equity markets turned to negative territory and pushed the zloty above 4.50 EUR/PLN. The Polish currency closed the session about 1% weaker.
The recent development only confirms how fragile CEE gains are. The region is still considered as risky, taking into account the financing needs and the sharp recession. Although the Polish economy is in both issues better positioned, it still has the most liquid FX market, which is considered as regional benchmark. Hence we believe the further development of risk aversion should be crucial for the weeks and months ahead. Concerning the upcoming sessions, the calendar of domestic events remains empty and we bet on further moderate profit taking that could lead the pair below 4.60 EUR/PLN.

Hungary

The Hungarian forint took a breath and remained around the 298 level on Tuesday. The Socialist party submitted the no confidence vote proposal to the Parliament and PM designate Mr Bajnai met the outgoing government’s ministers.

The Parliament has to vote about the new government within 8-days, on the 15th, the latest. If succeed, the new government will start to implement the proposed welfare spending cut package worth about 2-3% of GDP. The budget deficit overshoot path was confirmed by the March data, where the year-to-date deficit reached 75% of the full-year target. February trade data however posted a bigger-than-expected €280m surplus, suggesting that the economy has been adjusting to a much lower external gap than last year.

The market may follow the global sentiment for the time being and the chance is probably that we will see the currency slightly weaker around 302 in the next days.

The Hungarian bond market weakened in the morning and strengthened in the afternoon, allowing yields to remain broadly unchanged from the day before. The market is digesting the probability of a rate hike, while the long-end is anchored by the expected fiscal package. Foreign bond holdings fell to the historical low of Ft2407bn yesterday and if it bottoms out here, there may be not much room for further selling.

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