Headlines
Currencies: Czech koruna shrugs off confusing politics and firms
Fixed Income: Polish wages should show more signs of slowdown
Czech Republic
Czech politics becomes more and more exiting, but confusing too. Yesterday, the key political force - Social Democrats (ČSSD) announced that they were withdrawing their support for legislation to enable early parliamentary elections to be held in November of this year. The lower house of Parliament then decided not to vote on the early election bill because it was clear that it would not secure the three fifths majority required for the bill providing for the early dissolution of parliament. This effectively means that the elections will be held either in May or June of next year.
Interestingly the koruna (and also the bonds) shrugged off the news and the Czech currency even strengthened to EUR/CZK 25.32. This could be explained either by ongoing positive development in equity and emerging markets, or by the fact that the cancelation of early elections has paradoxically increased a chance that political parties find necessary consensus for approving the 2010 budget and needed expenditure cuts. But political developments are very fluid and nothing is done. For instance, interim Prime Minister Jan Fischer put pressure on main political parties as he announced that he would resign, if cuts reducing the 2010 deficit from CZK 230bn (7 % of GDP) to CZ 170bn were not approved.
Today, beside more and more interesting domestic politics the key item for the Czech fixed income market agenda is the auction of a 3Y government bond with a variable interest rate. The Ministry of Finance will supply bonds for CZK 7 bn in the auction. The previous tranche of this bond, issued in August, attracted reasonable demand, which enabled the Ministry to increase the previously announced volume. We also anticipate strong demand, with good chances for the volume supplied this time to be again increased.
| Currencies | change | |
| EUR/CZK | 25,34 | -0,7% |
| EUR/HUF | 270,3 | -1,5% |
| EUR/PLN | 4,148 | -1,9% |
| USD/PLN | 2,818 | -1,3% |
| EUR/USD | 1,471 | 1,2% |
| USD/JPY | 90,3 | -0,4% |
| Bonds 2Y | change | |
| Czech Rep. | 2,53 | 0,05 |
| Hungary 3Y | 7,95 | -0,10 |
| Poland | 5,15 | -0,06 |
| Slovakia | 1,94 | -0,01 |
| Eurozone | 1,25 | 0,03 |
| USA | 0,92 | 0,01 |
| Bonds 10Y | change | |
| Czech Rep. | 5,08 | -0,01 |
| Hungary | 8,32 | -0,02 |
| Poland | 6,20 | -0,08 |
| Slovakia | 4,83 | 0,15 |
| Eurozone | 3,29 | 0,04 |
| USA | 3,42 | 0,08 |
Hungary
The Hungarian forint continued its appreciating trend and approached the key level of 270.00/€ overnight. A strong performance of the Polish zloty together with some optimistic comments of Mr Bernanke brought back risk appetite to the carry trade of the HUF. The 270/€ level is a strong resistance to break and thus we would not be surprised to see a slight correction today or tomorrow, while in general, the 8.00% base rate level still looks attractive relative to the 3% underlying inflation that we may see next year.
The Hungarian fixed income market strengthened alongside the currency and on the back of intensifying rate cut hopes. The short-end rallied on views that the base rate could dip below 6.0% next year and the FRA market started to price in this scenario at the 9x12 tenor. This does not seem unlikely for us either as the underlying inflation trend looks to have been improving since the tax increase due to the low purchasing power of households (modest filtering through of the tax increase).
The long-end forward IRS spread has also narrowed to 215bps, close to the precrisis level of 200bps. There is still ample gap between bonds and the swap curve, which could shrink over the coming months and thus the bond market could be attractive not just as an outright position, but also on ASW basis
Poland
The Polish zloty strengthened to the 4.15 EUR/PLN area thanks to an improving sentiment on the global markets. Also slightly higher inflation may have helped the currency to stabilise. The inflation rose to 3.7% y/y in August, which is far from the NBP target of 2.5%. Nevertheless it is not a big surprise as one of the key swing voters Jan Czekaj said yesterday. It still rather supports our view of the end of the easing cycle and interest rate stability for the rest of the year.
Today, the labour market figures (wages and employment) may surprise on the upside. Although we still may see some deterioration on the labour market, it does not conflict with our view of a Polish recovery as the labour market should lag behind the cycle. We believe the zloty should stay in a positive mode today, but mainly thanks to the sentiment on the global markets.
