Czechs seek budget compromise for 2010

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Currencies: Czechs seek budget compromise for 2010

Czech Republic

The Czech koruna kept its previous gains as bullish sentiment in emerging markets remained in place. Moreover, the market received some encouraging news from the Czech Finance Ministry. Recall that minister Janota said that the draft for the 2010 budget could be based on a CZK 157bn (around 5.2 % of GDP) deficit after Friday’s meeting with political parties, unions and employers’ representatives. This would be a great improvement compared to the catastrophic scenario of the original proposal with the CZK 230bn (more than 7 % of GDP) budget deficit. Nevertheless, many political parties (ODS and Soc-Dem) still do not agree with all proposed tax and social benefits. So Janota will have to make some concessions to these parties before the final consensus is reached.

Today, the domestic calendar is empty, so the koruna will focus on core markets, while developments around the 2010 budget draft could be also watched. Still we do not expect much action ahead of Thursday’s central bank meeting.

The same could be actually true for the Czech yield curve as we do not think that there will be strong pre-positioning ahead of the CNB meeting. So, the yield curve volatility will remain very low, while the front end of the curve should be still supported by the strong koruna.

Hungary

The Hungarian forint finished the week broadly unchanged between 271.00 and 272.00. Weaker opening of the US equity markets together with mounting concerns about the oil market demand pushed the currency to the weaker end of the range, but so far the 272.00 level acted as a support.
The global marketplace looks to remain the key driver of the HUF and jitters from the oil market could affect the region, like the RUB, which could also weaken the forint slightly. Apart from this, markets look calm and steady and this is reflected by the continuous decline of implied volatilities of FX options.

The Hungarian fixed income market gave back part of last week’s rally and yields rose about 5-10bps. Current levels are still close to the 1-year low we saw couple of days ago, but the quick correction suggests that the market has become more sensitive to bad news. The generally positive inflation outlook has remained a valid argument for holding bonds, but new buyers may be more cautious. A wide ASW spread of bonds around the 100bps level could be more attractive from a risk/reward point of view than outright bond positions.

Poland

The Polish zloty came through very calm session and oscillated above 4.10 EUR/PLN on Friday. The zloty was lagging behind the koruna as there might have been some investors scaling down PLN/CZK long positions recently. Although the sentiment on the global equity markets is favourable, the zloty had problems staying below 4.10 EUR/PLN during last two weeks.

That poses certain technical risks to the zloty for the upcoming sessions. A series of domestic macro-figures including the important retail sales (scheduled for Wednesday) should bring more positive news supporting the Polish recovery story. Nevertheless if the zloty fails to appreciate both the domestic and core markets supporting trends, it could create the room for a more significant short-term correction. We remain bullish on the polish currency both in short and long term horizon, but we continue to monitor the technical warnings very closely.

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