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Czech Social democrats call for euro adoption by 2014/2015
Fri, Jan 22 2010, 09:34 GMT
eased significantly yesterday, tracking a negative correction in all risky markets. The EUR/CZK pair bounced back above the 26.0 level despite quite an optimistic promise made by Soc-democratic leader Paroubek. He said that its party wants to lower the budget deficit so that the Czech Republic can adopt the euro in 2014 or 2015. In our view, the market correctly considers such a target as unrealistic, because the fiscal consolidation will take more time. Moreover, the Soc-dem election program looks quite extensive in terms of public expenditures.
Today, the domestic eco calendar is once again empty, so the koruna might again focus on core equity markets and the zloty. Should they be able to recoup part of their losses, the koruna might also do so.
moved higher across the board by more than 5 bps yesterday, which could be a result of both hawkish comments from the Czech central bank and koruna’s weakening. Interestingly FRA rates have moved up significantly too, so the market began pricing in an early rate hike. For instance, the 3×6 FRA rate is more than 20 bps higher compared to the level at the beginning of the year. We expect that future developments of the money market and generally short end of the curve to be highly depended on the CZK performance.
weakening trend slowed down on Thursday and the pair recovered from the morning’s low of 272.50 to 270.00 in the afternoon. This was followed by another wave of weakening overnight to 272.00 followed by a small recovery to 271.00 this morning.
News from China about monetary policy decisions have probably the biggest impact on markets nowadays as carry players focus on possible liquidity tightening measures that would reverse gains from the last 12-months. If China decides to wait for some time after recent measures, we may see some recovery on markets, while further steps could keep exchange rates on the downward trend.
continued to feel the negative impact from the currency and yields reached a new record high for 2010. Yield levels at the long-end got close to 7.75%, which could be a key support level. If the currency stabilizes, bonds may also witness some recovery, but longer-term investors may remain cautious on Hungary before the April election.
failed to break through 4.00 EUR/PLN and weakened further on Thursday. The sell off on the global equity markets and worse than expected industrial output weighed down on the Polish assets. The industrial output disappointed mainly due to a slowdown in manufacturing at the end of the year. Nevertheless it still leaves our base scenario of ongoing recovery and potential for interest rate hikes in the mid 2010 intact. We are not as concerned about manufacturing as about construction, which was crucial for Polish regional outperformance in 2009. We are still afraid we may see some more severe firing in that sector during winter months, with possible negative impact on the domestic demand.
For the zloty it remains clear that testing 4.00 EUR/PLN is postponed as the global sentiment deteriorates. Even so, we remain mid term bullish on the Polish currency.