Low volume trading keeps CEE forex in wait and see mode
The Polish zloty inched gradually higher throughout the session on Monday following the technical correction which pushed the pair to two week highs last week. Activity was weak though with all eyes already on the MPC rate decision tomorrow. While we see no reason to be negative on the zloty in the very short term perspective (in the run up to the rate call) we keep on to our view that the zloty will be prone to corrective action during the dividend season and as the summer holidays start. Today, the EUR/PLN pair should keep to the 3.38-3.40 range though ahead of the MPC decision, with market activity likely to recover somewhat no earlier than tomorrow.
The Hungarian forint reacted slightly positively to the 25bps interest rate hike, but volume was low as most foreign banks were closed on Monday. NBH hiked the base rate to 8.5% as was widely expected and inflation projection was also pushed higher for 2008-2009 (6.3% and 4.2%, respectively), while core CPI forecast was maintained (5.1% and 3.7%). The report introduced the new 2010 inflation forecast at 3% for both the headline and core CPI. The overall message is that risks are on the upside, but the baseline scenario sees CPI meeting the target in 1Q 2010 and thereafter. The report concludes that food and energy are pushing inflation higher, but there have been signs of a decelerating inflation at the core level. Simor's speech emphasized that Council is committed to the inflation goal (again), credibility is of utmost importance and that both hike and hold is a possibility in the future. This represents a smooth exit from the rate hike cycle as, in our view, they keep the rate hike option on the table just in case something happens, while the baseline scenario is for a no change of the base rate. FRAs also reflect this outlook at 8.50/8.60% levels. The report contains a surprisingly bullish statement about the budget. It says that this year's deficit could be below the 4% target (table shows that they see GFS at 4%, ESA at 3.6%), while highlighting the importance of expenditure control. Nothing groundbreaking overall, the rate cycle seems to be ending here, lot of bad news has been priced in now, which suggests that the future may bring some relief, especially if the underlying trend continues to improve. We expect the HUF to set new range, probably around 242-245 and that yields will take over the role from HUF to react to news.
The Czech koruna kept its sideways mode around 25.10 EUR/CZK as the volumes were extremely low due to the Holidays in the US and the UK. There are no important events scheduled for today. Nevertheless we believe that mounting inflation fears on the global markets could weigh on the koruna during the week. It is important to watch the levels around 25.20 EUR/CZK, which in case of a break could open the gates for a further negative correction up to 25.50-25.60 area. The Slovak koruna was locked in a tight range between EUR/SKK 31.08-31.17 yesterday lacking any impetus due to the close of US and UK markets. Today, the focus will be on the interest rate decision of the central bank. In common with the market, we see no change of official rates thus we do not expect any market reaction. On the back of the eurozone entry, the NBS has to harmonize its rates with ECB ones. After governor’s Sramko words that it would not make much sense to change policy at the moment, it will happen later than we have originally expected. The direction of the local currency will mainly depend on external factors once US and UK based traders return from yesterday’s holiday.
The koruna has still potential to strengthen with the level of 31.0 within a sight. The Polish bond market fell further into lethargy on Monday as most players held to the sidelines ahead of the MPC decision on rates due tomorrow. Yields were unchanged across the curve and calm range trade remains the most likely option for the hours to come as the Council convenes for its two day meeting today. Meanwhile we stick to our buy on dips strategy since the Council could surprise the market with a hike and the remaining macro data (on retail sales) should confirm the strong pace of expansion in the real economy. At the same time we remain positive that the next big move in yields will be south once inflation moderates further out into the year. The Hungarian bonds did not move yesterday and it will be interesting to see how they react today, when trading will resume in full scale. The central bank message is mixed and question will be where market sees the real trend. NBH now sees higher headline inflation path for the next 2-year together with unchanged core inflation and with the message of meeting the inflation target in 2010, Bonds could perform well if investors see the current situation as the end of the 1-year old inflation shock, while short-term focused players could remain cautious. For us, Hungarian bonds have become more attractive since Hungary’s fundamentals will leap forward in convergence during the next 6-12 months.
The Czech fixed-income market started this week with quite trading. The swap curve closed the session almost unchanged, while the bond yield curve flattened, as the market did catch up previous developments in the Euro-zone. Today, the real trading starts as US markets open this week. Since we think that the US eco data today may be better than expected and thus be Treasury-negative, Czech bonds might follow suit. The 10Y benchmark yield might soon test the 5.00 % psychological barrier.
