The Polish zloty stayed in narrow range around 4.30 EUR/PLN as the effect of the IMF flexible credit line waned out. The Fitch comments on confirmation of the credit rating thanks to the IMF credit line did not help either. The market also failed to take profit from higher than expected inflation figures, which only supports our view on pause in interest rate cutting cycle in the upcoming months. Beside that the central bank governor said that ERM-2 entrance is not now a top priority, which could have been slightly negative for the Polish zloty. Today the focus is on wage and employment figures which should played down a bit the mid-term inflation risks that some NBP members are afraid of. Nevertheless the zloty should more focus on the global risk aversion and follow closely the US earnings season. Good performance of global equity markets is crucial for its attempts to test 4.201 EUR/PLN – crucial technical barrier (2008 high).

The Hungarian forint had a mild weakening on Thursday, but the 293.50 level limited the move. This was the resistance level on the way up last week and has now become a support level. The new government will hold the first meeting today and press has leaked an even bigger spending cut than before. An annual Ft900bn size of the package would be equal to 3% of GDP, more than earlier estimates of around 2% of GDP spending reduction. This could be good news for the market and may help the forint to recover, while the current momentum is for weakening. Central bank’s meeting on Monday may reveal some more information about the stance of monetary policy and how decision makers see the new situation. On the March meeting the three internal members voted for a 100bps hike so it will be interesting to see whether they have kept their dovish bias or not. The Hungarian bond market also weakened a bit with the currency and yields generally rose about 10bps. Rate hike expectations have now disappeared from the money market curve and this may not help the long-term outlook in light of the planned tax increases. Foreign investors’ bond holdings lowered to a record low of Ft2399bn, below the lowest from last October and highlighting the loss of interest from foreign investors.

Czech Republic The Czech currency developed in a sideways trading pattern yesterday as the market lacked stimuli from stronger price action. While regional currencies were stable too, positive developments in core equity markets did not trigger any strong price action. The koruna also ignores the domestic political situation, which has become clearer - Klaus reportedly he wants to put the new technocratic government to office before the May 9. Today, the domestic calendar is empty so the koruna, which can be used now as a funding currency for carry trades in Eastern Europe markets, might continue to watch the zloty. So eventually PLN’s gains might be met by koruna underperformance. The more stable Czech currency contributed to further steepening of the Czech yield curve yesterday. It is worth noting that higher risk appetite also contributed to tightening of asset-swap spreads at the long end of the curve. For 10Y maturities the spread tightened by around 20 bps. Today, the domestic bond market will continue to be driven by core market developments. Should risk aversion decrease further, there is a chance that the ASW spreads, which are highly elevated, will tighten further.

KBC