Scrap subsidy in Germany brings a record Czech trade surplus

Next report on Monday May 11, 2009

Headlines

Currencies: Scrap subsidy in Germany brings a record Czech trade surplus
Fixed Income: CNB expected to stay on hold despite a new pessimistic macro projection

Czech Republic

The Czech koruna moved sideways yesterday as the market has been awaiting today’s central bank meeting. Hence, the EUR/CZK was hovering close to the 26.70 level. Today’s session started in a positive mood for the koruna as the March trade balance figures revealed an unexpected high surplus of CZK 23 bn. The combination of German scrap subsidy and low oil prices delivered a record monthly trade surplus, which is a great news for the koruna. So, if the CNB matches our expectations and leaves the repo rate unchanged, the koruna will probably have a very good session today.

Yesterday, the main theme for the market was an auction of 3Y benchmark. An outcome of the auction was quite positive as the bid-cover ratio reached 2.21. The short and medium segment of the curve reacted to bond auction slightly positively, while the market was cautious ahead of today’s central bank meeting.

Today is a big day for the Czech fixed income market, because the CNB holds its interest- rate setting meeting. Although the Bank board will be discussing a new more pessimistic macro projection, we think that a high level of uncertainty and still weaker koruna (compared to its implicit projection) should suggest that the Bank Board leaves the repo rate unchanged. Should this scenario materializes the front end of the curve will probably move higher.

Hungary

The Hungarian forint appreciated sharply again after good news about foreign trade and industrial production improved the outlook. Foreign trade data posted €492m surplus in March, which is close to 0.5% of the annual GDP. Industrial output was down 15% Y/Y in March on a working-day adjusted basis, but was up 4% M/M hinting that the Hungarian crisis could come to an end. The pair strengthened to 281, a new 3-month high.

The Hungarian bond market improved with the currency as usual and yields lowered by about 10-15bps. The offer curve moved below the 10% level and therefore it became more difficult to buy forint denominated bonds at double-digit levels.

Poland

The Polish zloty slightly weakened as markets were cautious in the run up to US stress test release. The domestic scene is nearly empty this week. Investors did not pay much attention to the first swine flu case reported in Poland. Also the fact that IMF has approved $20.5 billion credit line for Poland was widely ignored

Today the pair should stay in wait and see mode ahead of US stress tests. It may take limited profit from the very good outcome of the Czech foreign trade. In the midterm we clearly remain positive on the Polish zloty and believe it could get back at least to 4.20 EUR/PLN

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