Forint steady despite huge improvement in foreign trade

Headlines

Currencies: Forint steady despite huge improvement in foreign trade
Fixed Income: Opinions among CNB’s Board members diverge

Czech Republic

Although, the koruna tried to firm intra-day it finished almost unchanged at the end of yesterday’s session. Interestingly, the currency market faced a lot of central bank talk, which however sent mixed signals as it showed aclear divergence among Czech rate setters. While CNB’s vice-governor Singer indicated in its presentation on the central bank web site that he can imagine more rate cuts, another board member, Eva Zamrazilova, proved that she is the only hawk in the current setting as she said that room for more cuts were slim and that the next move should be up. Last but not least, Governor Tuma did not talk specifically about interest rates, but he pointed out that the koruna is now close to it equilibrium level.

In our opinion, all the mentioned central bank talk showed that the Bank Board is divided and in this environment it is highly unlikely that the bank would change its policy. Hence, the repo rate will remain stable at least for several months. The central bank policy should act as a neutral factor for the koruna.

The same is true for the Czech fixed income markets, which should pay attention not just to CNB Bank Borad’s talk, but also to developments about the budget draft for 2010. In this respect, slightly positive news come from the political scene as the biggest party in parliament indicated that it was ready to support a package of benefits cuts and tax hikes outlined by the current care-taker government. Still it is not clear whether there will be a majority to support this package. Recall that if the package won’t be approved, the country’s budget deficit could reach almost 7 % of GDP. Hence, political developments might be the biggest threat for Czech bonds in the short term.

Hungary

After the Hungarian forint touched a new two-week high at 269.50 early on Wednesday, the forint started a weakening trend and slowly moved back to the key 272.00 level. It seems that the market is less excited about the expected rate cuts and the massive trade balance surplus. News about a change on monetary policy cycle from some other emerging markets like Israel or South Korea could limit the potential for further appreciation, too.

The Hungarian fixed income market became very quiet ahead of today’s auctions. The AKK will reopen the benchmark 3-, 5- and 10-year bonds today and information about the demand for Hungarian fixed income assets could set the tone for next days. The last auction two weeks ago showed modest interest that forced the agency to lower the supply. If the shallow demand continues the market could fear from a prolonged bear market trend.

Poland

The Polish zloty weakened further on Wednesday due to lingering budget concerns. The pair failed to appreciate improving sentiment on global equity markets as well as the weaker US dollar. The budget for 2010 is taking into account a nearly doubled deficit, which keeps many investors cautious. In mid-term, we expect a stabilization of public finances, which are in much better shape than in most of the Central and eastern European countries, but markets remain vigilant. The Poles sold fewer bonds than a month ago at a 5-year bond tender on Wednesday - its first debt sale since the government outlined the budget plans for 2010. The yield was up nearly 20 basis points compared with the previous tender. That is probably why the Polish zloty failed to break further south and came back as far as 4.13 EUR/PLN.

Nevertheless, we expect the budget jitters to calm down soon. Although the deficit growth is horrifying at first glance, a huge part of it is purely cyclical and part of the expenditure are one-off investments for necessary infrastructure associated with the European football championship that Poles will host in 2012. Hence we do not change our bullish view on the Polish currency in the mid-term and if the positive sentiment on the global markets prevails, also in the short term.

•  Download Full Central European Daily