Czech Eurobond issue back on the table

Headlines

Currencies: CEE currencies slightly stronger on US equities
Fixed Income: Czech Eurobond issue back on the table

Czech Republic

The Czech koruna received some support yesterday as the global equities turned to positive territory. The pair was pushed back below 27.00 EUR/CZK. The koruna ignored nearly all the interesting domestic news. Gov. Zdeněk Tůma said that the CNB has revised its 0.3% negative GDP growth forecast for this year to a decline of 1%- 2%. He said that he is cautiously optimistic and that the economy couldn’t fall forever. He also said the interbank-lending market has improved but remained far from optimal. Beside that the Central bank governor Pavel Rezabek proved that he remained one of the clearly dovish members of the board saying that he still saw the room for rate cuts.

Today the calendar of domestic events seems to be empty. We expect the koruna to track the development of global equity markets. We still see some underperformance vis-à-vis the neighboring Polish zloty.

Czech bonds eased in a very thin trading session and the yield curve flattened. There were no fresh domestic data. Nevertheless central bankers and politicians gave a lot of interesting interviews. CNB governor Z.Tuma expects this year’s GDP to shrink by 1-2% and the Finance Minister supposed a small growth next year. Mr.P.Rezabek, another CNB board member, expected interest rates could be cut due to low inflation pressures. However, he didn’t known yet whether he would vote for a cut in May. In this respect our baseline scenario for the May meeting is for an unchanged repo rate, which is currently priced in.

Interestingly, Finance Minister Miroslav Kalousek told Reuters that the CR could again start thinking about a eurobond issue, thanks to an easing of the risk premium. Actually, Kalousek is correct as the 5Y CDS of the Czech Republic stands at the 150 bps, which is by around 200 bps lower than in February, when the risk aversion peaked. We think that should the FinMin really tap the Eurobond market it could help the long end of the domestic yield curve.

Today, the main event for the domestic market is an auction of a 5,0%/2019 government bond benchmark. The MinFin is ready to issue CZK 7 bn this time. The auction is expected to be successful even as it might not reach the buying interest at last week’s auction. Interest for bonds might further increase if the Czech Parliament passes the bill removing the requirement for funds to use mark-to-market rules for bonds in their portfolio.

Poland

The Polish zloty came cautiously back to 4.36 EUR/PLN thanks to the better sentiment on the global equity markets. The markets ignored mixed signals from the central bank. Stanislaw Owsiak, who belongs to the dovish camp, suggested that the pause in interest rate cuts is not a done deal yet. More interestingly the swing voter Andzej Wojtyna said tha keeping the present level of the rate may be close to optimum. Wojtyna indicated that it is worth keeping some ammunition in case of a further economic deterioration and more serious second round effects. His comments as a swing voter are more closely watched and it supports our base scenario of pause in interest rate cuts on the next meeting.

Today the core inflation is scheduled to be released, but as it is not the market mover.

The zloty should once again refocus on the global emerging market sentiment. We are slightly negative on the zloty for the very near term as we do not see enough impetus for the pair to break through crucial technical levels at 4.201 EUR/PLN (2008 highs).

•   Download Full Central European Daily