The Polish zloty slightly weakened and the pair moved up to 4.46 EUR/PLN. The calendar of domestic events was empty and the focus was on debate on the Polish euro acceptance. The discussion was initiated by the Financial Times that quoted secret report of IMF that recommends the highly indebted countries to adopt euro fast, even in the case of not meeting the official criteria. The Polish finance ministry with its ambitious 2012 target for the euro commented on the news that it considers the euro to be a beneficial tool to fight the ongoing crisis. Nevertheless the reaction from the ECB was quite clear as well. Board member Nowotny said that every country must evaluate the risks connected with ERM2 membership itself and he ruled out any easing of the Maastricht criteria. Today we believe the pair should forget the euro discussion for a while and turn the attention to the global equity markets. Hence, we bet on sideways trading ahead of the start of the US earning season.

Yesterday morning the Czech koruna gained ground after the better-than-expected February trade balance, but gave up its gains later in the session. Looking at the February trade balance, the rapid decline in exports persists; yet foreign trade remains in surplus. February’s trade balance showed a surplus of CZK 8.7B, almost CZK 4B above market expectations. The foreign trade figure shows a rapid fall in both exports and imports, which is traditional for periods of recession. This time, exports from the Czech Republic dropped by 22.2% y/y, while imports were down by 21.5% y/y. Exports are still affected by poor foreign demand for eg machinery and means of transport, which make up almost 50% of Czech exports. Nevertheless, the trade balance figure was improved by cheaper oil.

The Czech bond market had a better session yesterday as the yield curve flattened in a bullish fashion. Nevertheless despite the fact that yield of the 10Y benchmark dropped by 5 bps it still remains very close to the psychological 6.0 % level. Today, the domestic calendar is completely empty and the market will probably also shrug off the ongoing discussion on the set of the new technocratic government. Therefore the focus might be on the developments in European core bond market. Interestingly, the FinMin announced the first issue of retail government bonds, in the third quarter of this year. The interest rate is to be announced soon before the issue date. The bonds might carry a variable rate linked to inflation. Still this news should have only minimal impact on the market in the short run. Hungary The Hungarian forint has continued to weaken on Monday and the depreciation accelerated after February IP posted a worse-than-expected figure at 25% Y/Y (28.9% Y/Y without working-day adjustment). Industry gives 25% of the supply side in GDP, so this alone warrants the currently expected 5-6% recession for 2009. The bad news is that the Bajnai package will deepen it further in the 2H09, while the fiscal stimulus in Europe may help somewhat. Together with the sourer sentiment on global markets, EUR/HUF and bonds seem to continue the correction phase.

EUR/HUF rallied from 314 to 293, so 50% correction would mean 302. The Financial Times reported an IMF idea about euroisation. This was however quickly rejected by the ECB after Mr Ewald Novotny said that it is legally not possible and economically unwise. The Hungarian bond market also had a correction after the IP data. On Monday yields fell about 50bps across the curve, but half of this gain has now been taken back. Trading is relatively quiet after many investors moved to the sideline after the recent turbulence and the fast pace of the recent rally caused many investors to miss it. All eyes are on the Friday inflation figure, which could reveal a bit more information about the weak exchange rate’s effect on inflation.

KBC