Swine flu will force CE currencies play defense

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Currencies: Swine flu will force CE currencies play defense
Fixed Income: Hungary wants to use up to €8 bn of the IMF loan to save the budget

Czech Republic

The Czech currency gained on Friday as risk appetite improved further at the end of the last week. Hence, the EUR/CZK pair dropped significantly below the 27.0 level, while the intra-day minimum reached at the 26.575 level. There were no domestic market moving factors on Friday. Given the global worries about the impact of the swine flu, the koruna had a poor start to the new week. We expect that most of the emerging markets’ currencies will be negatively affected by the swine flu story and the koruna will not be the exception.

The Czech yield curve steepened as yields at the short-end of the curve declined by around 4 bps. The only reason for a positive development at the front end of the curve could be gains of the Czech koruna, which usually support rate-cut expectations. We should add that a neutral comment, which came from inters-rate setter Hampl on late Friday, had no impact on the market.

Today and in fact, all week, the domestic calendar is empty, so the fixed income market will watch two main sources for its own price action – the domestic forex market (the short end) and the German Bund (the long end of the curve).

Hungary

The Hungarian forint finished the week with a positive tone at around the 292 level. The correction on global equity markets remained moderate and earlier good results of the restarted bond market auctions helped sentiment to recover at the end of the week. The market is fairly quiet though and players could stay on the sideline until the correction on emerging currency markets finishes.

The Hungarian bond market remained stable on Friday. The auctions on Thursday showed that there is some demand for Hungarian bonds, so it is not totally impossible to expect recovery of the bond market and rebuilding demand of foreign investors.

Poland

The Polish zloty underperformed compared to regional counterparts on Friday. The EUR/PLN pair stabilized around 4.50 EUR/PLN and failed to track the gains of the Czech koruna. Some investors might have rethought the speculation on PLN/CZK carry trades after a surprisingly higher than expected budget deficit announced earlier last week, which also put into question the Polish ambitious plan to adopt the euro. Furthermore finance minister Ludwick Kotecki speculated that the euro adoption could be delayed by one to two years.

From the perspective of the upcoming sessions, we believe the zloty to move in line with region – moderate weakening. Beside that, the carry trade on PLN/CZK should be put aside for a while, although we are convinced that the zloty is undervalued towards the Czech koruna.

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