The Polish zloty strengthened on Tuesday, the currency pair EUR/PLN began at 4.34 and closed the day at 4.271. The Polish currency was supported by lower that expected trade balance deficit and positive current account figures. However, the main driver was the Polish request to get $20.5 bln flexible credit line from the International Monetary Fund (IMF). Later on, the request was confirmed by Polish Finance Minister Jacek Rostovski. The head of IMF Mr. D. Strauss-Kahn reacted by saying that he expected a quick approval of the request as Poland has a sustained record of sound economic policies. Today’s release of CPI should show a small uptick (like in the Czech Rep. or in Hungary), but it should still confirm that inflation pressures are low.

The zloty should, however continue to digest the news about a new credit line, which should keep the currency relatively strong. The Hungarian forint continued its consolidation around the 290 level. The Parliament elected Mr Bajnai as the new PM yesterday. Opposition parties did not vote, so we may conclude that they passively agreed with the upcoming austerity package. Positive sentiment in the neighboring country Poland lifted the currency to 288, but the move was only temporary after weaker global equity market sentiment kept investors shy from carry trades. News calendar is particularly light for the next two days, thus we may have a relatively stable market. A more pronounced weakening could be limited by the higher yields as the bond market seems to have been accommodating to the changing risk premia on Hungary, which could help the currency to stabilize.

The Hungarian bond market had a mild weakening yesterday and the currency’s good performance was not able to reverse this. The combination of higher yields and stronger currency is relatively new and we have not seen it for many months now, so it could signal that the market has changed its thinking. Hawkish rhetoric from the central bank could have played a major role here as it is suggesting that exchange rate levels below EUR/HUF 300 are not acceptable. Consequently, this could mean that interest rates will take over the role from the currency in responding to incoming news and the market may try to keep the currency around the 290 level, which at the moment seems compatible with the 3% inflation target.

Czech Republic

The Czech koruna decoupled from other regional currencies as poor IP and retail sales figures weighted yesterday on the Czech currency. Recall that Industrial production fell by 23.4% Y/Y in February, after dropping by 22.8% Y/Y in January, while the February retail sales declined by 7.9 % Y/Y. We believe that these figures are really awful and more specifically, in case of the industrial production, we expect more positive figures in the coming months as the scrap subsidies in Germany lifted production of small cars in the Czech Republic. The Czech yield curve steepened yesterday as very weak February industrial production figures and also retail sales figures supported hopes for another interest rate cut. Interestingly, the front end of the cure fell despite the fact that the koruna visibly weakened on the released data. Today’s session started with a quick check of the March PPI figures, which showed there are no underlying inflation pressures (the PPI recorded 1.3 % month-on-month decline). Such news should further support the front end of the curve as the market might start to bet on CNB rate cut more aggressively. The main item on today’s Czech bond market’s agenda is, however, the bond auction. The ministry of finance offers CZK 8 bln of 3-year floaters, i.e. a totally new paper with float interest rate. As investors have preferred shorter maturities we expect that also this auction could invoke rather significant demand.

KBC