The Czech currency eased yesterday and again, it underperformed other regional currencies as some big London players started to use the koruna as funding currency in their carry trade plays in Central Europe. It seems that several big foreign banks established short CZK positions against the Polish zloty and the Romanian currency, which means in the short run that the koruna should underperform the rest of the region. Meanwhile, negative sentiment was also supported by a comment from the leaving finance minister Kalousek who said that that a schedule for adopting the euro will not be announced on November 1 of this year, as planned, because the early elections in October will delay it. He said that the CR would be able to meet the criteria if a political decision is made to adopt the euro in either 2013 or 2014. As the domestic calendar is empty, we think that the trading on the Czech forex market might be dominated by global sentiment. The koruna should work here as a carry trade funding currency, which will imply weakness, if sentiment on the Polish market remains positive.

The main event for the Czech fixed-income market was the auction of 3Y government benchmark. Recall that the Czech Finance Ministry sold CZK 11.527B worth 3- year floating rate government bonds. The demand reached over CZK 26B hence the ministry could sell CZK 11.527B, more than the expected CZK 8B even when CZK 3B kept in its books. Wednesday’s auction produced an average yield of 91.54 bps above the six-month PRIBOR of 2.69%. In our view, bids came mainly from local funds. In this respect the Czech bond market seems to stabilize as sentiment for riskier assets increased and political scene in the country subsided. Today, the market will start to focus on core bond markets, while the front end of the curve might be a little bit nervous about a development on the domestic currency market, which continued to loose and it poses some risk for bond with shorter maturities.

The Polish zloty gave back some of the sharp gains from the IMF rally on Wednesday. Nevertheless the zloty continued to outperform the regional counterparts as it is the most politically stable country with solid chances on growth during the current year and the possibility of ERM2 entrance. The Polish finance ministry said it does not intend to use the loan, nevertheless it can limit the volatility of the pair. This may mean that the Polish authorities still intend to enter the ERM2 in the first half of the year. Today the inflation figures are in the focus and we believe an increase should be zloty supportive. This could be another argument in favour of a pause in interest rate cuts for the upcoming moths. On the other hand, the influential board member Jan Czekaj argued yesterday in the press that he sees space for further interest rate cuts. Beside domestic issues of course the attention should be on the core markets sentiment which follows the US earning season.

Hungary

The Hungarian forint stabilized close to EUR/HUF 290 level on Wednesday as neither domestic nor foreign news was able to move the market significantly. The economic minister designate rejected the post after the press leaked that his former company was fined on cartelling. We expect quiet trading for now. The Hungarian bond market also stayed unchanged at current levels. AKK bought back 2-3 year papers again and announced the following buyback auction for next week. Buyback auctions are the only interesting issue at the moment on the Hungarian bond market.

KBC