Budget talks weigh on Polis bonds

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Currencies: Czech GDP surprisingly weak
Fixed Income Budget talks weigh on Polis bonds

Czech Republic

The Czech koruna was only little changed yesterday as US markets were closed for public holiday thinning the activity in the Czech forex market. The EUR/CZK has continue to hover around the 25.500 level despite better-than-expected foreign trade figures in July (the economy has already posted a CZK 89.4bn surplus for the first seven months of the year, which CZK 15bn improvement compare to the same period of 2008).
Today, the GDP details for the second quarter and employment figures for the August grabbed some attention. The GDP date showed that the economic contraction was actually deeper (for instance the CSO revised the decline in the first quarter from 3.3 % y/y to the decline of 4.5% y/y). Meanwhile, the unemployment rate was heading north as it reached 8.5 % in August, which means that it is at the highest level in four years. Both figures are obviously slightly negative for the koruna, but probably not in the short run as the bullish sentiment in equity markets will support all CE currencies including the Czech one.

The Czech fixed income experienced only very little activity yesterday as US markets were closed. Nevertheless, the front end of the curve dipped by around 4 bps, which probably means that the market started to price out unrealistic rate-hike expectations. Such a trend might be visible today too, as the fresh macro figures show continued weakness of the Czech economy (see the part about the CZK). Particularly the unemployment rate will curb any inflation pressure, so the CNB will not have any reason to raise its base rate. So, if the koruna stays in its current sideways mode, Czech FRA rates will probably fall in the coming days.

Hungary

The Hungarian forint was trading stable around the key 272.00 level and good news about the German export industry helped it to appreciate a little bit further towards 271.50 this morning. The IMF/EU teams announced the extension of the SBA by two quarters until 2010 October. The original €20bn amount will not change, but because only a minor €55m will be used of the current, 4th tranche of €1085m the remaining amount of the credit line will be cut into four different pieces.
The terms of the IMF loan will therefore cover the period of the Parliamentary elections next spring and help to minimize the volatility around it.

The Hungarian fixed income market was relatively quiet on Monday due to the stability of the currency. Yields at the 3-year segment broke through the key 8.00% level and settled at 7.95%. The longer duration of the IMF program will require higher domestic issuance and the debt management agency might try to increase the amount of bonds issued.

Poland

The news that budget deficit may double in 2010 triggered some selling across the Polish curve. After comments made on Friday the finance minister outlined a worst case scenario which counts with deficit of 7% GDP. Nevertheless the impact on the zloty was rather limited as riskier assets found support from G20 consensus on keeping the stimuli going forward. Hence the pair came back to the 4.10 EUR/PLN level.
We bet on a positive start to today’s session as the Asian markets posted solid gains and risky assets seem to be getting back into the course. If that sentiment prevails we see the zloty to attack 4.00 EUR/PLN soon.

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