Czech GDP revised sharply upwards

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Currencies: Czech GDP revised sharply upwards
Fixed Income: Polish dovish talk continues

Czech Republic

The Czech koruna outperformed other regional currencies, notably the zloty, as the Czech statistical office revised GDP figures. The Statistical Office revised its GDP growth figure for the fourth quarter of last year from a preliminary quarter-on-quarter negative growth rate of 0.6% to a positive 0.7%. The statistics bureau delayed the announcement by five hours so it could incorporate new VAT figures from the finance ministry. This made a dramatic difference in the final growth rate for the quarter. On a y/y basis, the decline for the final quarter was 3.1%, and for the entire year the dip in the economy was 4.1% (we will cover the issue in more detail in CEE weekly).

Today the US retail sales should be crucial for the overall sentiment in the region. If the optimism prevails, we expect the koruna to extend gains below 25.50 EUR/CZK.

The Czech yield curve steepened on Thursday. At once again above-average trading volume the shorter end of the curve lost over 1 bps; the longer one gained over 3 bps bps. Even as the Statistical Office revised up its GDP growth figure, household consumption declined more than CNB had expected. It supported the expectation that the central bank would not rush to raise rates and maintained interest in shorter bond maturities. The movement on the longer end of the curve corresponded to the development on the euro area markets.

Today's current account will have hardly any influence on the market. In an interview, the CNB vice governor Mr. Singer dismissed speculation that the CNB could further reduce rates, even though he referred to a surprise fall in household consumption. Today, we expect that the interest in shorter maturities may continue and the yield curve might extend its steepening trend.

Hungary

The Hungarian forint had another quiet day around the 267.00 level on Thursday. Inflation was a tad better than consensus at 5.7% Y/Y after the January spike to 6.4% Y/Y, while detailed fourth quarter GDP data repeated the recent pattern of a positive net export contribution counterbalanced with negative domestic demand.
Monetary Council member Mrs Nemenyi hinted that rate cuts may continue, which could mean that central bank will do another 25bps move to 5.50% in March. The near future could depend on this afternoon’s US data as it may set the tone for emerging currencies.

The Hungarian fixed income bonds kept on the good performance. Yields delinked further on the whole curve as this time not just the long-end advanced, but shortdated securities, as well, after the dovish comment from Mrs Nemenyi. The FRA curve has lowered to 5.35% from the previous 5.50% level, which implies not just another 25bp move in March, but also some 50% probability of an April cut. This seems a bit optimistic for us, but as long as the international backdrop remains supportive this can be the trend for the market. Long-term forwards however remained high at 255bps (5y5y forward spread) showing that concerns about the sustainability of the fiscal consolidation and rapid convergence of Hungary are still alive.

Poland

The Polish zloty slightly weakened and continued its moderate negative correction on Thursday. The pair touched 3.91 EUR/PLN during the day, but it does seem to be nothing more than profit taking for now. The move was clearly supported by ongoing dovish comments from Polish central bankers. Yesterday Elizabetha Chojna-Duch said nothing pointed to a need to increase interest rates.

Today US retail sales and subsequent reaction of global equity markets should be crucial for trading on the Polish market. If the bulls come back to the stage, the pair could return to 3.85 EUR/PLN.

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