NBP should stay on hold and deliver dovish comments

Headlines

Currencies: Polish retail sales higher on food and Easter spending
Fixed Income: NBP should stay on hold and deliver dovish comments

Czech Republic

The Czech koruna firmed yesterday as better US consumer confidence lifted sentiment in emerging markets. Hence, the EUR/CZK moved a bit south despite the fact that the Moody’s rating agency said that it began rating reviews of top Czech financial institutions with possibility of downgrades in some cases. The local forex market will continue to track foreign events even today as the domestic calendar is again empty. In this respect, the koruna might get some stimulus from Poland where the central bank holds its interest rate setting meeting. Should the NBP keep rates unchanged as we expect, the koruna would get some indirect support and it might extend its gains.

The Czech yield curve steepened in a bullish fashion as yields dropped along the whole curve yesterday. Since news about the new supply coming from the Czech MinFin was mostly negative, the only reason for a positive price action could be just the stronger currency, which further fuels rate cut expectations. In this respect we think that it is very likely that the CNB cuts its repo rate again on its June’s interest rate setting meeting.

Although the domestic market will continue to digest information about preparing the budget draft for 2009, the key market movers will remain foreign events. In this respect, should the koruna be able to extend its gains on the back of the stronger emerging markets (including the Polish zloty), the Czech short yields might move even lower.

Poland

The Polish figures came out surprisingly better than expected. Nevertheless the zloty failed to appreciate and followed risk sentiment on the global market, which improved during the afternoon. Polish retail sales rose in April for the first time in three months and unemployment surprisingly dropped. Concerning retail sales, the Easter week could have helped in April. Beside that, it is worth mentioning that retail sales are nominal figure in Poland and much of the growth can be attributed to recent spike in inflation. Furthermore growth in retail sales was driven by food, which is the main driver of inflation as well. Hence we do not believe that domestic consumption can bring much added value and effectively offset the drop in investments and exports in first half of 2009.

Uncertainty concerning inflation and growth should keep the NBP in wait and see mode today. Beside that the central bank should release slightly dovish comment pointing to the possibility of further interest rate cuts. That should not be very surprising for the zloty, which should refocus on US figures and the overall sentiment on the equity markets in the afternoon.

Hungary

Yesterday morning, the Hungarian forint continued its weakening trend and also the decision from the central bank to keep rates unchanged (at 9.50%) was unable to support the Hungarian currency. but the better-than-expected US consumer confidence data helped it to recover in the afternoon. This resulted in an overall unchanged level around EUR/HUF 280.50. Otherwise the market has been quiet and the pair could follow the international sentiment.

The Hungarian bond market followed the currency as usual these days and yields rose slightly earlier in the day, but lowered back to around the 10.00% level by closing. Rate cut expectations settled down around 150bps over the next 12-months.

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