Despite the much better than expected outcome of the April current account, it did not trigger a big price action in the Czech koruna, which was traded in a tight range close the 26.7 level. It might be worth noting that the C/A reached a surplus of CZK 9bn, while the market expected CZK 5bn deficit. The reason for such a good figure was lower dividend outflows, which is very likely a consequence of worse results from domestic firms owned by foreigners. So the repatriation of profits is lower this year. Interestingly, the main opposition party – the Czech SocDem – unveiled parts of its election program, which counts with koruna’s entry into the ERM2 system already in 2010. We think its quite ambitious plan since the EMU entry seems unrealistic until 2014.

The Czech yield curve steepened further yesterday as the markets bet that the possibility for a rate cut next week has increased. The CNB announced that the two board members – Singer and Hampl will miss the central bank meeting next week and since both members could be considered as moderate swing voters the front end of the curve declined. In our view, in such a situation, the decisive vote will have governor Tuma. We tend to believe that he will rather vote for rate stability, but we reckon that the vote will be very tight this time. Concerning yesterday’s trading, we should add that the MInFin offered 3Y benchmark with floating coupon. The outcome of the auction was a bit mixed as the Ministry sold just CZK 6 bn (while the plan was CZK 7bn), while the bid-cover ratio reached just 2.78. Hungarian forint continued this week’s weakening trend on Wednesday as the global equity market sentiment remained bleak. The pair set a two week high of 284.00 during the day followed by a recovery to 281.00. The outlook therefore remained dark, while light positioning suggests that the market may move gradually lower instead of a sharp move.

The Hungarian bond market has been affected only slightly by the currency as lower core market yields helped fixed income securities. The situation is pretty similar to the currency, so we would remain cautious for the next weeks. Poland The Polish zloty stayed in tighter range above 4.50 EUR/PLN, ignoring improving current account figures and more or less reflecting the indecisiveness of global equity markets. For the rest of the week the zloty should stay under the influence of the global equity markets and Eurodollar. Hence the outcome of the Philly Fed and initial claims should be more important than domestic wage growth. On the wage front we bet on certain stabilisation in the wage dynamics, which should nevertheless not be seen as too optimistic. The households in meantime still face surprisingly high inflation and from the real point of view, there situation is not improving. Beside that, the overall situation on the labour market continues to be tough, which should be confirmed by the weak employment data.

KBC