Czech inflation approaches further to zero

Headlines

Currencies: Hungarian trade balance improved sharply
Fixed Income: Czech inflation approaches further to zero

Hungary

The Hungarian forint continued its (rather slow) appreciating trend on Tuesday and the pair broke through the key 272.00 level and reached a two-week high at 270.50. This morning’s foreign trade data about July was much better than expected at €548m, up almost €1bn from the same month last year. Higher tourism revenues and drastically falling import (import was down 32% Y/Y) on the fiscal consolidation were likely behind. These data point for a higher overall trade surplus for 2009 and lower current account gap, which could help the currency to appreciate slightly further.

The Hungarian fixed income market had another good day as yields lowered again around 5bps across the curve. The longer-end got close to the key 8.00% level again and the 5y5y forward IRS spread over euro narrowed to 220bps, close to this year’s low of 200bps, which was also the pre-crisis level.

The outlook might depend largely on the currency and the international sentiment as it seems unlikely that the forward spread could shrink below the pre-crisis level year, while the short-end has already priced in deep rate cuts to around 6.50%. 

Poland

Polish ministry of Finance approved the outline for the 2010 budget, which is expected show a deficit that is almost twice as much as this year’s forecast. The main reason is continuing misery in revenue collection due to sluggish GDP growth. Beside that, the country is preparing for the 2012 European Championship in football and is pushing ahead massive government investments. Nevertheless the final outcome does not have to be as bleak as the Ministry outlines. We consider the outlook pretty conservative and there is solid chance that key budget assumption (including GDP) might come out stronger. The zloty was a bit nervous from budget talks so it did not follow the gains of risky assets on the global markets.

Nevertheless we think the budget debate should vane out as Standard & Poor’s said quite clearly it does not suggest any changes to the Polish rating and they expect a gradual improvement in the upcoming years. Hence the zloty should rely solely on the global markets sentiment for the rest of the week. We continue to see the opportunities for bulls and our short term target is slightly below 4.00 EUR/PLN.

Czech Republic

Yesterday, the Czech koruna moved again sideways and the EUR/CZK pair settled close to the 25.500 level. Hence, the currency shrugged off worse-than-expected final GDP figures for the first half of this year.

For today’s trading, the main domestic item for Czech markets was the release of the August inflation figures. The CPI surprisingly dropped by 0.2% M/M, which translates into minimal 0.2% Y/Y growth. These figures confirm our scenario that any speculation that the CNB might act soon in terms of unwinding very low interest rates appears pre-mature.

While the inflation reading might be negative or neutral for the Czech currency, it will be definitely positive for the Czech fixed-income market. Especially, the short end of the swap curve and FRA rates might extend its downward correction. Beside, the positive inflation readings, the Czech bond market should be supported by Moody’s comments as the agency repeated that Czech sovereign ratings will not be affected by the postponement of early elections.

Later today (exactly at 14,00 CET), both the Czech forex and the fixed income market will keep a close eye on an on-line interview with the CNB Governor Tuma, which will be posted at the financial server www.patria.cz. 

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