The forint extends gains ahead of the MNB meeting


Currencies: The forint extends gains ahead of the MNB meeting
Fixed Income: Czech government will face confidence vote – markets do not care

Czech Republic

Czech markets were only little changed and it seems that they already enjoyed Christmas atmosphere yesterday. The calm trading was visible despite the fact that the main opposition party ČSSD succeeded in calling a no-confidence vote in the cur-rent centre-right government. The vote was called after the resignation of Environ-ment Minister Pavel Drobil (from ODS), who was caught in a corruption scandal. Al-though because of the scandal, there are tensions within the government coalition, but we believe that they will be able survive the confidence vote and the markets bet on it too. That is why the confidence vote should not be a big deal neither for the koruna nor for Czech bonds.


The Hungarian forint continued to strengthen on Thursday and the EUR/HUF pair broke the 275.00 level and appreciated 1% to the 273.00 level this morning. It seems that central bank’s hawkish rhetoric together with improving risk appetite on financial markets helps the forint. On Monday, the central bank will be in a difficult position, when they decide on rates. October wage data showed only 1.2% Y/Y wage increase and the slowdown of wage growth could mean that there is no demand pressure on inflation and thus the recent food and energy price shocks could have only a tempo-rary impact.
Economists have mixed views about the outcome of next week’s central bank meet-ing, roughly half of them - including us – expect another rate hike to 5.75% from 5.50%, mainly on the basis of their comments that they started a rate hike cycle in November.
The bond market rallied about 10bps and finally FRAs are also started to react to the stronger currency. The long-end of the curve is now close to the key 7.75% level and yesterday’s strong demand on the auctions showed that demand for Hungarian pa-pers is still strong. The FRA market now expects only 75bps rate hike for the next 6-months, 25bps less than a week-ago.
Bonds 2Ychange
Czech Rep.1.83-0.01
Hungary 3Y7.70-0.08
Bonds 10Ychange
Czech Rep.3.960.04


Yesterday we were slightly disappointed by the Polish wage figures. On the other hand, employment continues to gradually improve. Putting it together with accelerat-ing growth, we believe it makes a case for monetary tightening, as we argued in yesterday’s flash report. Nevertheless our December rate hike call remains highly un-certain. Doves in the MPC remain strong with backing of the governor Belka, who continues to be afraid of sharp zloty’s appreciation as a reaction to the beginning of the tightening cycle. Given the current distribution of power between doves and hawks (roughly 50:50), it might be the governor, who will be a key median voter. Yes-terday minutes confirmed strong division between hawks and doves. Some members argued that accelerating GDP growth and the risk of growing inflation justified in-creasing interest rates, but on the other hand the majority still thought that weak de-mand pressures justified the rates at record lows.
The zloty continues to trade near 200-day moving average and may react positively to stronger industrial output.