Both the Czech koruna and Czech bonds continued to firm yesterday, despite the controversial ruling of the Constitutional Court. The Constitutional Court annulled a law that taxed a state-subsidized building saving scheme that was introduced as part of the consolidation plan, passed last year. The scheme would have been expected to raise CZK 6-8 billion, which the government will now have to find elsewhere. Czech Finance Minister Kalousek, however, quickly replied that the MinFin would cover the gap additional savings.
Hence, it is not surprising that the bullish environment in the Czech bond market has not been violated and the MinFin easily sold its 3Y bond benchmark with bid-to-cover ratio 3.5.
Dovish words coming from the Fed and the depreciating USD will probably help both the koruna and bonds to gain further, while the EUR/CZK pair might soon test the 24.0 support level.
The Hungarian forint appreciated to new highs after the Fed meeting, similarly to other high-yielding currencies which received good demand yesterday. The pair fell below the key 263.50 level, which acted as a resistance level in the previous two appreciation trends earlier in April and hence it looks that the forint may break out from this level on the strong side. If this happens, the 262 level could come into the picture, which was the low of the trading range before 2010 April. Unless risk aversion returns to markets, we expect this to happen soon.
Hungarian bonds also responded positively to these developments and yields are moving south of the key 7.00% level across the curve. The FRA curve has basically become flat and therefore if interest rates continue to come down, the possibility of a rate cut may arise. Long-term forward spreads also narrowed suggesting that the current rally could be sustainable as the market is also getting more optimistic on the long-term outlook.
Polish FinMin plans to exchange money from European funds into zlotys, which bolstered the Polish currency yesterday. A deputy Finance Minister Dominik Radziwill said yesterday that the ministry would definitely swap the funds this quarter. The move should help curb inflationary pressures stemming from high commodity prices.
NBP chief Marek Belka said that the zloty had become a “speculative currency” and that the central bank had a relatively limited possibility to influence the exchange rate precisely. Belka dismissed the possibility of changing the inflation target but also added that high commodity prices made delivering inflation close to the target in almost every month impossible.
We think that dovish comments made by Fed’s Bernanke at yesterday’s press conference could support the polish currency. On the other hand, the room for prospective gains should be limited due to the fact that the balance of payments revision still hangs in the air.