The Czech koruna was once again pretty unmoved by escalating domestic political tensions. Two major coalition parties (ODS, TOP 09) want all the ministers of the smaller coalition partner (VV) to be replaced. VV are willing to accept this only when some other ministers (including minsters of finance and defense) are replaced as well. The talks are currently in stalemate. Negotiations can be pretty tough, but finally we believe VV should back the government project as early elections would be a nightmare for the young small party right now. On the other hand it remains questionable how the current weak government can push through all the important planned reforms including pensions and health care.
For the sessions ahead it looks that the koruna is pretty well locked within the 55-day (24.35) and 200-day (24.67) moving average. Although the band is narrowing, the risk of break-through in any direction is limited for now.
Concerning the Czech bond market, the focus will be on the primary market as the MinFin is going to offer a government bond benchmark with variable rate, which matures in 2023. Given the fact that the Czech CDS have performed very well in recent weeks, we expect strong demand in the auction.
Forint steady after weakening pressure
The Hungarian forint remained broadly stable yesterday between the levels of 266.00 and 267.00. The market tried to weaken the forint beyond the 267 level after the higher inflation reading was published, but deeper analysis suggested that it was again caused by supply-side shocks and demand driven inflation remained low. The global trend of a lower oil price and weaker growth outlook did not move the market much, probably because the euro remained strong.
The Polish zloty slightly depreciated on Tuesday. The Monetary Policy Council member Andrzej Bratkowski made unusually clear comments yesterday. He told Reuters that the central bank should increase interest rates by 50 basis points in May and consequently send a clear signal that rates would be left unchanged for at least three quarters. Bratkowski also said that the zloty had a potential to strengthen and that the rate hike should let the currency appreciate (and hence curb inflationary pressures).
Today in the afternoon, the March inflation figure will be released. Similarly as the rest of the market, we expect that the inflation in March reached 3,9 % on a year-onyear (y/y) basis. Moreover, we estimate that the figure might even top 4 % y/y as early as in April. We anticipate that the central bank could raise interest rates to 4.5% this year. Unlike Bratkowski, we expect a more gradual approach consisting of two hikes by 25 bps in July and Q4/2011.