Polish industrial output in focus

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Currencies: Forint extends positive start of the week
Fixed Income: Polish industrial output in focus

Czech Republic

The Czech currency shrugged off more dovish comments coming from the central bank and the fact that the leading opposition party and big proponent for early adoption said that it suggested to postpone the euro entry process. Hence, the koruna moved basically sideway around the EUR/CZK 26.65 level.

Given the empty domestic calendar, the market will focus on developments in other markets – particularly in global equity markets. We continue to believe that the EUR/CZK will remain less volatile than the PLN or the HUF in coming weeks as carry trades on the PLN/CZK and HUF/CZK pairs imply that the koruna will be less sensitive to swing in global risk appetite.

The Czech yield curve flattened despite more dovish comments, which the market heard from the CNB Bank board yesterday. Recall that CNB Vice Gov. Mojmír Hampl said that there are some positive signs of recovery but that all the news from Germany is still negative. Concerning the monetary policy, he added that given the ongoing uncertainty he could not exclude another interest rate cut. Thus, this is just another sigh that the Czech central bank is ready to ease its monetary policy even further.

Today, the main event on the domestic market is an auction of a 15Y government bond. The MinFin prepares to issue CZK 8 bn this time. An outcome of the auction is highly uncertain as the market prefers shorter maturities. If the MinFin would like to sell the whole amount it will have to accept higher yield. Tomorrow’s holiday in many European countries and today’s issuance of German and France papers could also influence the demand for Czech bonds.

Hungary

The Hungarian forint continued this week’s positive trend and after a mild intra-day correction. In the afternoon, the pair narrowed to the key 276.00 level, some 2% stronger than Monday’s close at 282.00.

Ex-coalition member Free Democratic party’s Gabor Horn said that if tax reform fails, early elections should come. This is the first sign that the European Parliamentary elections on the 7th of June could have political consequences. The government will discuss the 2010 tax law proposal this week as it has been trying to put together some tax restructuring in order to lower the tax burden on labour.

The early election scenario may increase short-term uncertainty and this could lead to some forint weakening, while the medium-term fundamental outlook is still positive in our view as the country has been cutting back on the external gap significantly in 2009-2010.

The Hungarian bond market followed the currency another day and yields lowered by about 10-20bps across the curve. This means that it is increasingly difficult to find yield levels about 10% and only the mid-part of the curve is around that, while other parts are below. The T-Bill auction went on with surprisingly strong demand and the agency was able to raise the issued amount by 10bn to Ft40bn. AKK also said that it may launch a eurobond in the second half of the year, which would be a positive sign about the country’s return to market based financing.

Poland

The Polish zloty gained further ground on Tuesday supported by a smaller decline in wage growth and slightly better than expected employment figures. The message from these numbers to the MPC is broadly neutral and does not have major impact on our monetary policy outlook that counts with the pause in rate cutting cycle for one more month.

Today the focus should be on industrial output, which should confirm continuing deterioration in April after surprisingly mild decline in March. As it is one of few key figures ahead of the MPC meeting, it should be closely watched. The pair is trying to get back to the 4.20 EUR/PLN area, but it may not be easy in case of negative surprise. Furthermore the zloty is still highly dependent on the foggy global equity market.

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