Polish 2012 EMU entry may be at risk

Headlines

Currencies: Polish 2012 EMU entry may be at risk
Fixed Income: The Czech inflation surprises on the upside

Czech Republic

The Czech currency firmed but underperformed the rest of the CE currencies yesterday. The koruna lagged behind its regional peers despite the fact that Klaus accepted to appoint director Jan Fischer of the Statistical Office to the post of premier of a care-taker government. On the other hand the koruna might not like signals that official authorities do not like the idea of early EMU entry – for instance CNB Governor Tůma also said yesterday in the Czech Senat that entering the eurozone is not the solution for the CR to the current crisis.

The market will start the session with a brief look at the March CPI figures. Latter on, however, the better tone on equity market should further support the whole CE region and the koruna.

The Czech curve steepened in a bullish fashion yesterday, which could be a result of the stronger koruna. Nevertheless the volume was rather thin. On the budgetary, the main political parties ODS and ČSSD agreed on a crisis relief package that includes a bonus of CZK 30,000 for people who scrap a car that is at least 10 years old. The government will set aside CZK 2.5bn for this, which is not a high figure but still it will marginally widen the budget and probably also the trade deficit.

Today, initially, the bond market is going to digest the March CPI figure, which was a bit higher than expected. The month-on-month figure came out at 0.2 %, while the market expected 0.1 %. The higher inflation was a result of higher food and tobacco prices, which definitely does not change positive inflation outlook. Nevertheless, the CPI figure released is not positive and the market might give up some of yesterday gains, because of that.

Poland

The Polish zloty gained back the losses from previous three sessions on Wednesday. It weakened briefly at the beginning of the session in reaction to the comments from NBP that Poland should avoid entering into ERM2 in 2009. Nevertheless under the original plan to adopt the euro untill 2012, the Poles would have to enter ERM2 in the first half of this year. This now seems less probable as the zloty’s recent volatility makes both NBP and the ministry of finance more cautious. On the other hand the news does not seem to surprise the markets too much. The spread of the Polish ten year bond over the German bund has been constantly around 3 percentage points. Hence the zloty was able to ignore the news and took profit from the decline in risk aversion on global markets.

The pair is currently near stronger supports at 4.40 EUR/PLN. The volumes should be low ahead of Easter holidays and we believe the pair to stay cautiously optimistic above 4.40.

Hungary

The Hungarian forint resumed the appreciation trend and after opening a tad weaker at around 298-299, it climbed to as high as 288 overnight. Stop losses on short positions could be mainly behind the move, while generally positive emerging currencies has also contributed to the move.

The move from around 310 to 290 has been quite sharp and yields also fell substantially raising the possibility that the recent move has overshot the equilibrium level and some correction should occur before the market settles down. Tomorrow’s inflation may also adjust the picture and higher CPI in Czech suggests that Hungarian CPI may also be higher than expected Consensus is looking for 3.1% Y/Y reading, which we have also estimated, but the surprise may come from a higher reading as it is difficult to estimate the effect of the super-weak currency.

The Hungarian bond market had a massive rally and yields dropped another 50bps during the day. This means that only the 2-3-year part of the curve has offers with double digit yield levels. The overall situation is quite similar to the currency, yields fell sharply and tomorrow’s inflation data may be a cool shower to the market.

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