Czech Republic taps the Eurobond market with 5.5Y bond issue

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Currencies: Zloty recoups part of its losses ahead today NBP’s meeting
Fixed Income: Czech Republic taps the Eurobond market with 5.5Y bond issue

Poland

It seems that the stop losses on the Polish zloty are over, at least for some time. The pair came back below 4.50 EUR/PLN and clearly outperformed the regional counterparts. The nearly 2% rally was triggered by better than expected US consumer confidence. The investors ignored the risk of swine flue that could further hit Central European open economies highly dependent on foreign trade.

The main attraction of today´s session is clearly the MPC meeting. We believe that the rates should stay on hold, but the board should clearly confirm staying in easing bias. We suppose that the GDP growth forecasts above 1% y/y may prove to be too optimistic and that there is space for further rate cuts. Nevertheless the current mood on the board is more cautious and therefore our base scenario counts with only one more cut in June, which should mark the end of easing cycle at 3.50%.

Czech Republic

The Czech currency shrugged off dovish comments coming from CNB’s vice governor Singer and continued to trade in tight range yesterday. The EUR/CZK pair hovered around the 26.75 level ignoring the news that the Czech MinFin has been selling the Eurobond for a plan amount of EUR 1.5 bn.

Today, the domestic calendar is empty but the koruna might watch the zloty and its reaction to the NBP decision. The existence PLN/CZK carry trades could mean that the koruna might go to an opposite direction than the zloty.

The Czech yield curve flattened in a bearish fashion yesterday, despite some dovish comments coming the central bank. Recall that CNB Vice Gov. Miroslav Singer said that a new forecast from the central bank will call for a drop in GDP this year of more than 2%. This is a more pessimistic scenario than we expect for the Czech economy this year.

The domestic bond market also shrugged off rather positive news that the Czech finance ministry launched the sale yesterday of 5.5-year eurobonds and recorded solid demand. The guidance for pricing is at 190 bps above mid-swaps, which is in line with the Czech Republic’s CDS.

This morning, we heard another dovish comment from the CNB as Bank Board member Hampl said that the economic outlook was not rosy. The front end of the curve might benefit a bit from these news items, but we do not think that the market might change its view that the CNB will stay on hold next week.

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