Higher inflation may help the forint gain

Headlines

Currencies: Higher inflation may help the forint gain
Fixed Income: Czech inflation surprisingly lower thanks to health care

Czech Republic

The Czech currency eased slightly yesterday as global equity markets went through a negative correction. Still the koruna losses were quite limited.
Today, the trading has begun with a brief check of a fresh batch of macro data. The most interesting figure is the April CPI figure, which was unexpectedly low. The yearon- year inflation dropped below 2 %, which was less than the market had been expected. This might support fresh bets on another rate cut, which won’t be currency positive scenario.

Czech bonds decoupled from the more positive development in core bond markets and ended little changed. On the other hand, the money market continued to digest Thursday’s 25 bps rate cut and rates fell across the whole Pribor curve.
The heavy domestic macro calendar might actually further support the downward pressure at the short end of the yield curve. The April CPI dipped 0.1% m/m, which brought the year-on-year inflation below 2.0 %, which is the new inflation target. Hence, the market might be almost sure that the headline year-on-year inflation will fall below 1.0% in coming months, which might result in more dovish comments from Czech central bankers.

Hungary

The Hungarian forint joined the global correction trend and weakened back to below the 280 level for a short-term late afternoon. The Parliament accepted the second part of the Bajnai package that will push up the VAT rate to 25% from 20% and reduce social contributions paid by the employer.
The April inflation data was way above expectations at 3.4% Y/Y, up from 2.9% Y/Y in March. It seems that the weak forint takes its toll on inflation as well and the forint could benefit from this. The currency appreciated back to 279 after the data.

The Hungarian bond market followed the currency in its correction and the inflation data has accelerated this move. Yields are back to above the 10% level at the shorter-end, while the long-end has so far remained anchored.

Poland

The Polish zloty was under moderate downward pressure at the beginning of the week as it tracked the correction on the global equity markets. It was not able to profit from hawkish comments made by Marian Noga. That is probably because Noga is a well known and consistent hawk on the board and so his comments are not surprising for market participants. Beside that the zloty ignored the plan of the finance ministry to bring the budget deficit back below 3% GDP by 2010, which to many investors does not seems very likely.
Today, the calendar is empty from the domestic statistics point of view. We believe the zloty can track further potential correction of the global equity markets. The major attraction of this week is the inflation report scheduled for release on Thursday.

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