Swine flue fears drive the CEE currencies lower

Headlines

Currencies: Swine flue fears drive the CEE currencies lower
Fixed Income: Polish market looks out for Wednesday’s NBP meetings

Czech Republic

The Czech currency to some extent tracked the losses in the CE region yesterday. In fact the koruna outperformed the Polish zloty, which once again supported our hypothesis that some market participants play carry trades on the PLNCZK pair. It means that in case of higher risk aversion (like yesterday), the koruna should feel better than the zloty.

Today, the domestic and regional calendars are empty. The market will watch core markets and particularly the equities and the EUR/USD, which might give the best indication on which way risk aversion is moving.

The Czech yield curve steepened a bit yesterday. Given the lack of market moving factors, the price action could be related to more stable/stronger koruna, which supports the front end of the curve in these times.

Today, the domestic calendar is again empty, but some last-minute comments before the black out period might come from domestic central bankers. Nevertheless we do not expect that any of CNB Board members could send a market moving signal. Currently, the market rate expectations are closely tight to the ‘on hold’ scenario, which is in line the CNB monetary strategy.

Hungary

The Hungarian forint was traded surprisingly quiet and stable after many weeks of heightened volatility and Monday’s trading range of 294-296 was another confirmation of this. Selling pressure triggered by the swine flu fears eased during the day and similarly to the performance of other key emerging currencies, the forint stabilized in the afternoon. News that unemployment rose to 9.7% in March did not have any effect this morning as it fits into the expected recession path.

The Hungarian bond market has also become quiet and sidelined players may allow the market to remain silent. This is however not bad at all as high yields of double digit levels like 10.5%-10.7% may lure back investors if the risk attached to the recent volatility decreases by time.

Poland

Monday’s polish eco figures didn’t bring many surprises. The decline of retail sales was in line with consensus and the rise in unemployment confirmed sharp deterioration of the domestic labour market. Nevertheless investors continue to walk away from the carry trades on PLN/CZK as Poland’s euro hopes fade. A finance minister official confirmed that the government is updating the roadmap to the euro on Monday. Although the current target date is not completely out of question, it becomes highly improbable given the outlook for the public finances and inflation. The zloty,, similar to its regional counterparts, suffers of the rise in global risk aversion due to the uncertainty on the impact of the swine flue on the global economy.

We do not bet on an improvement of global investor sentiment in the near future. Hence, the zloty might weaken as far as 4.70 EUR/PLN ahead of the NBP meeting.

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