Headlines
Currencies: CEE currencies extend gains on global optimism
Fixed Income: Czech 10-year auction attracts solid demand
Czech Republic
The Czech koruna extended gains as it shrugged off both warnings from the European Commission about the budget situation and the September C/A figure (CZK 3.7bn deficit). Recall, the EC requires to bring the Czech budget deficit back below 3% of GDP by 2013. So, the koruna continues benefit from positive global sentiment in risky markets plus the fact that the CNB stayed on hold last week. Hence, The EUR/CZK pair slipped below the 25.5 level while the intraday low was reached at the 25.325 level.
Both the Czech Forex and fixed-income market will await tomorrow’s GDP release, which might confirm that the bottom in the business cycle has been reached even in Central Europe. Meanwhile, the Czech fixed income market might continue to gain supported by the strong koruna. The bullish sentiment that was seen in the bond market declared the successful bond auction too. The auction of 5.00%/2019 benchmark initiated solid demand as we had expected. Demand exceeded the basic offer of CZK 5B and reached CZK 8.2B. Therefore in the end, the Finance Ministry sold bonds for CZK 5.675B and kept CZK 2B in its books. Average yield was 5.111%, i.e. lower than 5.710% in previous tranche of the same paper in mid July.
| Currencies | change | |
| EUR/CZK | 25,42 | -0,5% |
| EUR/HUF | 269,5 | -1,0% |
| EUR/PLN | 4,133 | -1,7% |
| USD/PLN | 2,745 | -2,8% |
| EUR/USD | 1,498 | 0,0% |
| USD/JPY | 89,8 | 0,0% |
| Bonds 2Y | change | |
| Czech Rep. | 2,13 | 0,00 |
| Hungary 3Y | 7,16 | -0,11 |
| Poland | 4,90 | -0,10 |
| Slovakia | 2,51 | -0,09 |
| Eurozone | 1,22 | -0,02 |
| USA | 0,82 | -0,03 |
| Bonds 10Y | change | |
| Czech Rep. | 4,22 | -0,04 |
| Hungary | 7,45 | -0,16 |
| Poland | 6,13 | 0,00 |
| Slovakia | 4,46 | 0,17 |
| Eurozone | 3,32 | 0,00 |
| USA | 3,43 | -0,05 |
Poland
The markets were closed and the trading was pretty illiquid on Wednesday. That was may be why the zloty became the regional leader and the pair fueled by prevailing optimism touched 4.12 EUR/PLN. We doubt that domestic factors played any role. Comments of one of the rate setters Marian Noga who believes in real convergence story and stronger zloty did not really bring any crucial news to the table.
The markets should be primarily driven by the sentiment on Wall Street. If current optimism prevails, we may see retesting of strongest 2009 levels at 4.066 EUR/PLN. The investors should also eye the inflation figures scheduled for Friday. These should confirm a slow come-back of the inflation to more comfortable zone for MPC.
Hungary
The Hungarian forint had had a rather quiet day on Wednesday and stayed in the range of 269.00 and 272.00. Better than expected inflation data probably limited the upside in the currency as it may extend the easing cycle. The underperformance of the forint vs the zloty is a clear sign about the forint’s weaker potential for further strengthening.
The Hungarian fixed income market rallied sharply with the currency and yields dropped almost 30bps above the 3-year maturity. Offer levels have thus narrowed the key 7.00% level again at the longer-end, which was the bottom of the previous rally. Money market rates have also become more optimistic about the future and FRAs dipped below the 6.00% interest rate level. The 4x7 tenor for example is now trading around 5.60%, which would mean several months of rate cuts from the current 7.00% level. This is usually supportive environment for the bond market, which is still trading at wide spreads relative to swap rates. The ASW spread is about 70bps wide, which could shrink to almost zero if the market witness a full-recovery to precrisis levels.
