CNB can use more than one tool to ease the policy according to vice-governor

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Currencies: CNB can use more than one tool to ease the policy according to vice-governo
Fixed Income: Czech 15-year auction in focus

Czech Republic

The Czech koruna continued to decouple from its regional peers as the CNB stepped up its dovish talk yesterday. A 25 bps rate cut looks like a done thing on the November central bank meeting. On top of that, the bank is apparently considering other ways how to ease its policy further. Vice Governor Miroslav Singer said there might be a discussion at the next board meeting about using several complementary instruments to raise the inflation rate to the desired level. We think that beside a direct forex intervention against the koruna, which was mentioned yesterday by CNB governor Tuma, there are two other ways how the CNB might ‘quantitatively ease’ its monetary policy. The CNB could either buy government bonds (like the Fed for instance) or it could extend the maturity of its repo operations from 3M to 12M (like the ECB for instance). We think that the former option is more likely (while the forex intervention remains the first option), as the banking sector has no problem with liquidity, while government bond yields remain still quite high given the fact that inflation is heading into negative territory.

This new monetary policy context/risks mean that the koruna might continue to underperform the rest of the region in the days and weeks to come, while there could be quite an interesting rally in the Czech bond market. Today, however, the koruna could try to catch up some previous gains of the zloty or the forint as a release of the August foreign trade showed another strong surplus (CZK 10.5 bn). On the other hand, positive sentiment in the bond market will remain firmly in place. Moreover, there should be a strong demand for today’s bond auction of a 15Y government benchmark (the MinFin offer CZK 7 bn worth of bonds).

Hungary

The Hungarian forint market hardly moved on Tuesday and the pair stayed close to the key 267.00 level. August preliminary industrial production data was slightly disappointing with a 0.7% M/M drop and -19.9% Y/Y change. Consensus expected the figure at 18.0% Y/Y, but we would not be too pessimistic on this as the industrial sector posted three consecutive months with gains. Some downward correction was already likely.

The Hungarian fixed income market was also hibernated as investors showed weak interest on the 3-month T-Bill auction. Yields however did not increase probably due to the lower core market yield levels.

Poland

The Polish zloty was clearly the regional winner. It profited most of global markets optimism probably partly still thanks to the Government deal with Dutch firm Eureko. Beside that, the zloty has a much more attractive carry than the neighboring koruna and there is no serious threat of further monetary easing in Poland as the recovery is ahead of the region and as inflation stays at elevated levels.

The zloty stayed below 4.21 EUR/PLN for the second consecutive session. It is quite surprising to us how easily the pair came back below this important technical level after breaking above it. Although we remain cautious with our short-term stance, it looks as the Eureko deal could have been the catalyst for the bulls to come back to the market. The rest of the week and the next as well are empty on the domestic scene. So, the global sentiment driven by the start of the US earning season should be decisive for the pair.

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