CEE: Buy PLN/CZK

Mon, Apr 14 2008, 13:00 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S


We recommend being long in PLN against CZK for the following reasons:

PLN

  • • The Polish central bank (NBP) has resolutely reacted to the recent rise in inflation by tightening monetary policy and recent comments from NBP officials signal that we will get yet another rate hike at the next Monetary Policy Council meeting by the end of the month.
  • • Furthermore we expect a final hike to be delivered around May/June, bringing NBP’s leading rate to 6.25%. Observing FRA rates there is only priced in another 15-20bp of tightening over the coming months, which in our view leaves plenty of upside potential on FRA rates and further downside po-tential on EUR/PLN.
  • • Furthermore we must admit that we have underestimated the strength of the Polish economy, which in the CEE-region stands out as one of the most balanced economies. See editorial in New Europe Weekly, week 16, published on 11 April.

CZK

  • • EUR/CZK moved from 25.025 (Friday’s ECB fixing) to as low as 23.00 overnight in a thin market and currently trades around 24.80 (roughly 1% stronger than Friday’s fixing). We recommend util-ising the strength in CZK to shorten the currency.
  • • The Czech central bank (CNB) is very concerned about the levels in CZK, and it has recently to-gether with the Ministry of Finance discussed several measures to stop the ongoing strengthening of CZK.

PLN/CZK

  • • The trade currently offers 2% carry p.a. We see further potential for a widening of this carry, as NBP is still in a tightening cycle, while CNB will not hike further unless CZK weakens dramatically.
  • • This trade offers no real dependence towards movements in G3 currencies.

Published on  Mon, Apr 14 2008, 13:06 GMT

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