Czech IP and retail sales surprise on the downside

Headlines

Currencies: Czech IP and retail sales surprise on the downside
Fixed Income: Steepening of the Czech yield curve might continue

Hungary

The Hungarian forint remained around the 290 level during the Easter Weekend and the formation of the new government has not yet triggered any significant activity on the market. The correction mode seems to have started among global emerging market currencies and this could keep the forint on the back foot as well. The Parliament may vote about the new government this week and if elected, it may announce more details about the upcoming austerity package.

March inflation data were a tad better at 2.9% Y/Y and the unexpected decline of new car prices against a weaker currency suggests that the exchange rate may not translate into higher inflation due to the recession. Interestingly, the minutes about the March central bank meeting showed that the 3 internal members (the Governor and two Vice Governors) voted for a 100bps rate hike. The six external members however were stronger and opposed the move. Central bank thus seems more hawkish than before and this could give some support to the currency.

The Hungarian bond market remained broadly stable on Friday and Monday as the currency’s weakness has caused only minor correction for bonds. Yields are generally trading around the 10% level and the market may continue to follow the currency as the inflation is not an issue, yet.

Czech Republic

The Czech currency begins this week where it closed the previous one. At the beginning of the session, the koruna is facing very poor figures coming form the Czech industry (the sector dropped 23.4 % y/y in February) and from retail sales (down by 7.9% y/y). But the negative figures had no impact on the koruna. The release of the February current account figure is not expected to have a lasting impact on sentiment, because they are already partly known (the trade balance figure came at CZK 8. bn deficit).

Czech bonds will start to trade this week with a quick check of the February IP and retail sales figures. They confirmed that the state of the economy is weak as industrial production plummeted further, while retail sales accelerated its (year-on-year) decline. This news should be positive for the front end of the curve as the market should bet on another rate cut from the CNB. On the other hand, these poor figures might be necessary good for the long end of the curve, because they will indicate weaker budget revenue and potentially stronger bond supply in future.

Poland

The Polish zloty slightly weakened and the pair moved up to the 4.35 EUR/PLN. This was mainly due to profit taking in low liquidity session. The weakness could have been supported by continuing uncertainty about the initial roadmap to eurozone that counts with the ERM2 entrance in the first half of 2009.

This week is quite interesting from the macro-figures point of view. The main issue is the March inflation figure, scheduled for tomorrow. A moderate increase could be favorable for the zloty as it supports our base scenario that NBP should stay in wait and see mode in the upcoming months. Nevertheless sentiment in the whole region should mainly follow the starting US earnings season.

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