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Central European Weekly

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EUR/PLN still hovers around the 4.2 figure

Mon, Oct 19 2009, 10:39 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

New eco data from the economy point again to a CNB rate cut

Hungary

Bonds rally on rate cut hopes

Poland

EUR/PLN still hovers around the 4.2 figure

The Week Ahead

The MNB is going to cut rates for the fifth time in a row

Overview

Amazing Rally on the Czech and Hungarian bond mar- kets

Well, good times seem to have begun for Czech and Hungarian bonds. Looking at yields of 10Y bonds, they dropped by 50 basis points and more in October, which translates in price rises by around 4% in a few days. This is huge, given that bonds in the euro area performed poorly last week.

At first glance, the positive stories of Hungarian and Czech bonds differ in many as- pects. However, a closer look reveals that they have much in common. Nevertheless, ultimately it comes down to supply and demand. Now that the governments in both countries have succeeded in maintaining the budget discipline in spite of the reces- sion, excessive bond demand has automatically started to emerge. With regard to the Hungarian bonds, the main reason is the very attractive yields offered amid abundant global liquidity, while in the Czech case, the central bank has played a major role re- cently. Indeed, in addition to the liquidity situation, also of the domestic banking sec- tor, the CNB sparked speculation that it might start buying bonds in a similar fashion as the Fed or the Bank of England has done. In other words, they would supplement their rate policy with a quantitative one.

How long may such a favourable situation on the Czech and Hungarian bond markets persist? It may last until the forint and the koruna weaken significantly, which would discourage both the MNB and the CNB from continuing to ease their respective monetary policies. Both central banks are set to cut their rates again at their next meeting, and this may not necessarily be the very last easing. This primarily applies to the Hungarian central bank, which will cut rates today.

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Published on  Mon, Oct 19 2009, 10:49 GMT