Polish GDP figures may further support the zloty

Headlines

Currencies: Polish GDP figures may further support the zloty
Fixed Income: Czech Finance Minister warns about country’s rating downgrade

Czech Republic

The Czech koruna strengthened again on Thursday. After an initial EUR/CZK 25.50 looked at 25.40 for a short period, later on lost a part of its gains and closed the day at 25.459. The Domestic scene was without important incentives. Signals from political parties that unpopular provisions to lower budget deficit could be postponed to the new parliament formed after October’s elections (for more see the fixed income part) have no impact on financial markets.
The preliminary August industrial production released this morning showed a 18.4% y/y drop, i.e. worse figure than had been expected. Such a result could mean that the Czech economy has not surpassed all problems and may ease the Czech currency today.

Czech FRA and short IRS rates jumped several bps yesterday, while it is very hard to find any reason which would explain the price action.

Today, the release of the July industrial production was again quite disappointing. Hence yesterday’s negative price action could be partly reversed. This might even happen despite the fact that bearish news related to the Czech public budget performance continues. Finance Minister Eduard Janota said yesterday after a meeting with leaders of the two main political parties (ODS and Soc-Dem) and with the PM of the current care-taker cabinet Jan Fischer that the two party chairmen indicated that it will not be possible to debate any budget cuts before the elections. Thus, he will have to submit a 2010 budget with a deficit of CZK 230bn (more than 6 % of GDP), he said. He added that a jump from a deficit last year of 1.6% of GDP to such a deficit next year could result in a downgrade of the country’s credit rating. Even without this, he said, the country’s borrowing costs are rising this year by CZK 8bn. Debt-servicing costs will rise from CZK 55bn this year to CZK 80bn next year, he added. We think that while the warning about the long-term sustainability of the Czech public finance are correct, we doubt that any rating agency would act so quickly to downgrade the Czech debt as Janota indicated. But definitely, the budget development might become an issue for the market in a period surrounding October’s elections

Hungary

The Hungarian forint continued the correction for the second day and the pair touched a week low at 271.50. Comments from Monetary Council member Mr Banfi intensified the move as he spoke about the possibility of more deep rate cuts at a size of 2pp and that a slightly weaker currency between 275 and 285 would be beneficial for some segments of the economy.
Overnight trading however saw some recovery of the forint to just above the key 270.00 level and we do not think that the ultra-dove Mr Banfi would mean much in the 9-member Council.

The Hungarian fixed income market had a slight correction as the currency’s weakness and lower demand on the auctions decreased the attractiveness of the Hungarian convergence play. The debt management agency auctions a new 3-year bond besides the reopening of the 5-year and 10-year papers, but it had to cut back on the issuance due to the lower demand. It seems that foreign investors moved to the sideline after the sharp rally and they are digesting whether the next move will be a bigger correction or the positive trend will return.

Poland

The Polish zloty strengthened a bit in a calm session yesterday. Cautious trading reflected uncertainty ahead of September that usually brings higher volumes and surprises. The pair just went back to the 4.10 EUR/PLN.

Today the GDP figure should come out in positive territory mainly thanks to the domestic spending. This could be slightly positive for the zloty, but we do not bet on big moves today. Many global investors may stay in wait and see mode ahead of heavy data next week including US payrolls and ISM. Hence the flow s to risky assets should be limited.

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