Friday, December 10, 2010

Hungary's inflation matches expectations

Currencies: EUR/CZK still fights with the 25.10 resistance
News: Hungary’s inflation matches expectations

Czech Republic
Central European currencies saw calm session on Thursday. The EUR/CZK currency pair was trading sideways. While it tested several times the key 25.1 resistance, it failed to break above it. The same might be expected at the end of this week – should the pair break through this level, the next target might be immediately the EUR/CZK 25.500 level.

On the other hand, the Czech fixed income market might feel some relief as November inflation matched expectations and remained exactly on the CNB targeted level (2.0 %). Moreover, the central bank said that the so-called monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, remained close to the lower boundary of the tolerance band around the inflation target, at 0.9%. This contributed to a 10 bps drop of the longer-term swap rates.

The Hungarian forint remained in a stabilization mode on Thursday and the pair was traded in the narrow range of 277-279. Inflation was unchanged in November at 4.2% Y/Y and core inflation ticked up to 1.9% Y/Y from 1.8% Y/Y. Food and energy are still the main drivers behind inflation, but demand-driven inflationary pressures are low, which could be an argument against the central bank’s hawkish assessment. In the details, processed food inflation showed signs of deceleration, which could improve the outlook, but we doubt this would change the central bank’s view significantly for now.

The bond market continued to improve on the stable currency and yields lowered another 5-10bps at the long-end, thus yields are now below the 7.90% level. Longterm forward spreads remained unchanged suggesting that lower yields are due to decreasing fx volatility and the general assessment of fixed income assets has not changed significantly.

The Polish zloty was flat on Thursday and closed slightly stronger at 4.035 EUR/PLN.
Interestingly, Monetary Policy Council's member Andrzej Bratkowski said yesterday that central bank should raise interest rates during the December meeting or wait two or three months in order to curb prospective wage increases and to slow lending growth. Clearly, Bratkowski again changed his mind and turned back to hawks. This means that December's rate setting decision will undoubtedly be accompanied with lively discussion.

Regarding today's trading, we expect that the zloty, as well as the rest of risky assets, should be under the pressure due to possible further tightening of Chinese monetary conditions.

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