The Czech koruna came under selling pressure due to profit taking on global equity markets. Nevertheless, sentiment stabilized and the currency trimmed all the losses by the end of the session. This could be thanks to pretty positive flow of domestic figures at the beginning of the week. These on one hand confirm the ongoing recovery – historical trade balance surplus (+13 bln. Korunas) and accelerating industrial output (5.3% y/y).

On the other hand, looking deeper into the figures, it is clear, that the recovery is fragile so far. The better foreign trade balance is partly effect of slow imports (slow domestic demand) and new orders in industry are still pretty weak. Weak domestic demand is also reflected in continuing disinflation trend –inflation surprisingly slowed to 0.6% y/y in February. Hence we do not expect the Czech national bank to hurry up with the interest rate hikes and we stick to our base scenario of first interest rate hike at the end of the year.

The Czech koruna should follow further development on the global equity markets in the sessions ahead. Nevertheless it may be difficult to get below 25.50 EUR/CZK for now. On Tuesday, the Czech yield curve at average trading volume decreased along the whole length and steepened. Interest in bonds was supported by the February’s consumer price index indicating m/m stagnation and confirming that inflationary pressures remain still out of the game. Inflation figures, annual price growth at 0.6%, is even below the CNB's forecast anticipating a rise in consumer prices by 0.9% y/y. Today's current account will have scarcely any influence on the market. However, yesterday’s m/m zero inflation and expectations that CNB will keep low rates during the first half of this year at least, may support interest in domestic bonds also today.

Hungary The Hungarian forint corrected yesterday despite better than expected industrial output data. The pair lost 1% to the key level of 268.00, where it got some support and recovered to the 266.50 level overnight before settling down at 267.50 this morning. The negative move after the better data suggests that the market has probably become more sensitive towards weakening, which could be a sign that players have started to get cautious before next month’s elections. This morning’s GDP data confirmed the preliminary reading of a 5.3% Y/Y decline on an adjusted basis. Hungarian fixed income bonds advanced a little bit further yesterday and yields lowered 2-3bps again, the same as the day before. The market seems to be a oneway bet for many investors, who see the election as an opportunity to put fiscal matters into order. However, the historical experience suggests that this pre-election optimism usually turns into post-election disappointment and given the risks about the budget and inflation we see the chance for a similar outcome this time. Current low level of yields could be a good opportunity to unload forint bonds as the bond market may also got concerned more about politics in the coming weeks. Poland

The Polish zloty went through a solid sell-off at the beginning of yesterday’s session. It was primarily pure profit taking supported by rather dovish comments from the MPC. Andrzej Bartowski dampened expectations on interest rate hikes this year citing the high level of uncertainty over the outlook. Meanwhile Andrzej Rzonca warned against further appreciation of the Polish zloty. Nevertheless the Polish currency similarly to the koruna trimmed nearly all the losses and came back to 3.87 EUR/PLN. The domestic calendar is empty for the rest of the week and the zloty should somewhat stabilize and wait for further development on the global equity markets. For now it seems to us pretty difficult to test 3.85 EUR/PLN.

KBC