Headlines
Currencies: Latvian fears weigh on the region
Fixed Income: High demand but also high yields in Czech 10-y auction
Czech Republic
As feared, the Czech koruna eased yesterday as fears for a devaluation in Latvia affected sentiment in the whole CE region. A comment made by technocratic PM Jan Fischer was another negative factor for the koruna as he said it would be very difficult for the CR to return to growth next year. We basically agree as we forecast only a modest recovery in 2010.
Today, the koruna will particularly watch the events in the Baltic region as rumors about a devaluation of the lat continue circulating. Still we expect the EUR/CZK pair will be less volatile than the Polish zloty, while to break above the 27.0 figure might be a challenge for the koruna.
The Czech yield curve (both the bond and swap) steepened in a bearish fashion yesterday. Obviously the long end of the curve is still afraid about the future supply, which could be the result of growing budget deficits. It was also visible in the results of a 10Y bond auction. Although the MinFin was able to sell CZK 9.19 bn, the bidcover ratio declined to 1.75 and the averaged yield (5.757 %) was also much higher than in the previous auction.
There is no domestic data on the agenda today. Hence the Czech fixed income market might track other markets. Particularly, the domestic forex market could bring some (negative) stimuli, if the koruna weakens further. In such a case a bearish flattening could be expected.
| Currencies | Close | change |
| EUR/CZK | 26.89 | 0.4% |
| EUR/HUF | 287.8 | 2.8% |
| EUR/PLN | 4.529 | 1.6% |
| USD/PLN | 3.113 | 0.0% |
| EUR/USD | 1.422 | -0.7% |
| USD/JPY | 96.2 | 0.1% |
Hungary
The Hungarian forint weakened sharply to 289.00 late in the afternoon from the opening level of 280.00 after Latvia was not able to sell government bonds. All eyes are on the Baltic country now whether the government will be able to secure its financing either with IMF assistance or without. If so there could be some relief. This weekend’s Parliamentary elections may also contain political risk as we discussed yesterday. So investors could remain cautious in the next two days.
The Hungarian bond market followed the currency and weakened in step as yields rose slightly above the key 10.00% level. Fixed income securities are thus now offering yield levels a tad above 10%, while the 5y5y forward spread has widened to 300bps from 285bps. Rate cut hopes have also receded and the market now sees the base rate only some 140bps lower at 8.1% in 1-year time, up from about 7.5% a week-ago.
| Bonds 2Y | Close | change |
| Czech Rep. | 2.94 | -0.02 |
| Hungary 3Y | 10.29 | 0.02 |
| Poland | 5.53 | 0.03 |
| Slovakia | 0.68 | -1.93 |
| Eurozone | 1.42 | -0.04 |
| USA | 0.92 | -0.04 |
| Bonds 10Y | Close | change |
| Czech Rep. | 5.85 | 0.08 |
| Hungary | 10.23 | 0.04 |
| Poland | 6.34 | 0.05 |
| Slovakia | 5.10 | -0.27 |
| Eurozone | 3.59 | -0.09 |
| USA | 3.58 | -0.05 |
Poland
The Polish zloty has been hit by the fears of a devaluation in Latvia, too. The Baltic state that posted nearly 19% y/y fall in GDP failed to sell any of its offered T-Bill in auction yesterday. It raised fears about other regional recipients of IMF help as well as about the countries with stronger linkages to the Baltic region, including Poland. The weakness of the zloty was further enhanced by the negative correction on the global equity markets and the pair broke above the key 4.50 EUR/PLN.
Although the zloty may remain weak today, we do not expect significant losses. The fundamentals of the Polish economy have proved to be strong compared with eurozone and the Central bank and government are committed to defend zloty in case of further weakness.
