CEE currencies firm across the board

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Currencies: CEE currencies firm across the board
Fixed Income: CNB Governor will not become EU commissioner and stay at his post

Czech Republic

The rapid inflow into risky assets after positive outcome of G20 weekend-meeting boosted sentiment in the CEE region. The Czech koruna extended gains that started with the CNB no-change decision last week. The pair yesterday tested 25.50 EUR/CZK and ignored both lower inflation and never-ending hassles around the post of the Czech EU commissioner, where the CNB governor Zdenek Tuma is one of the candidates on the short-list.

If optimism on the global markets prevails, we believe the doors for further gains are opened. Speculators may play the CNB indecisiveness story now and can try how much the board withstands in case of the koruna strengthening. Hence we would not be surprised with the koruna moving around 25.00 EUR/CZK in the near future. That’s also why we upgrade our mid-term outlook till the end of the year.

The Czech bonds were only marginally changed yesterday. The yields were lower by about 2 bps and the curve slightly steepened. Positive sentiment was probably supported by a stronger koruna and slightly lowers inflation figures. Nevertheless the activity on the market was very low and it is hard to make any stronger conclusions from yesterday’s price action. Today the calendar of domestic events is more or less empty. Refusal of the CNB governor Zdenek Tuma to take the position of the Czech EU-Commissioner should not have major impact on the market. The curve could further steepen on the strong koruna today. On the longer end the investors should be cautious ahead of 10-year auction scheduled for Wednesday.

Hungary

The Hungarian forint had a good start of the week on Monday. With the help from global equity markets, the pair appreciated about 1% during the day to as high as 271.50, where it found a resistance level and bounced back a bit to 272.00.

The most important news was that opposition leader Mr Orban said that the deficit could be as high as 7.3-7.5% of GDP in 2010. This level is way higher than the 3.8% of GDP target laid down in the IMF program and would require renegotiation of the program. Markets might react negatively to this kind of news, albeit this was not cited on the wires yet and elections are months away, so there could be some pause before the attention really turns towards the deficit.

The Hungarian fixed income market rallied about 10bps with the stronger currency and yield levels are again getting closer to the 7.00% level at the long-end. Upcoming CPI and GDP data could alter the picture about Hungary, but in general the recovery could stay intact as long as the global backdrop remains supportive.

Poland

Like other currencies in the region the Zloty celebrated the 20th anniversary of the fall of the Berlin wall by appreciating as the EUR/PLN fell below the 4.20 figure yesterday. The Polish currency like usually enjoyed the bullish sentiment in global equity markets, while news about ongoing privatization efforts of the government could be taken as positive factor for the currency too (recall that the government plans to sell assets worth of USD 13B).

Today, the domestic eye-catcher could be the September C/A and foreign trade figures. The market expects a relatively wide deficit (almost EUR 0.5bn), which might not be the case given the fact that both in the Czech and Hungarian foreign trade posted huge surpluses in September. Hence, there could a positive surprise for the Zloty on the domestic macroeconomic front.

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