Gadget and US latest news

The Czech koruna extended its gains and outperformed its regional PEERs as the EUR/CZK pair touched the 25.30 level at the end of the last week. The koruna was not only supported by the strong industrial production data, but the improving sentiment in emerging markets too. Interestingly, the parties of the future coalition have reached a final agreement on a program of the future government. The agreement calls for such things as an increase in the 10% VAT rate by up to 2 percentage points as of 2011. We think that a potential impact on inflation will be modest (look for an increase of the 0.3 percentage points). Regarding the CPI it is interesting that the latest figure from June showed that dipped to the 1.2 % level in year-on-year basis.

This means that the domestic demand remains very weak, which is a bullish signal for the Czech bonds, but is not positive fore the Czech currency. The Hungarian forint finished the week in a good mood and the currency quietly slipped through the key 280.00 level and closed the week at 279.50. There is not much to discuss on the fundamental front, economic trends are broadly in line with the consensus view built around a gradual recovery, while politics has also become quieter during the summer. The key issue of July-August will be the assessment of the government program by the joint IMF/EU team, while the government keeps the possibility of a 2nd IMF program open. Economic Minister Mr Matolcsy said that there may not be a new deal at all cost, while other advisors close to the PM say that the second program could be used as a guarantee even in case the money is not used.

If you find yourself confused by what you’ve read to this point, don’t despair. Everything should be crystal clear by the time you finish.

The Hungarian fixed income market hibernated on Friday as yields stabilized just below the key 7.25% level at the long-end. Rate hike expectations have also softened with the stronger currency, but lack of stories keep investors uninterested about the Hungarian market. Poland The Polish session was rather calm on Friday. The currency tried to break below 4.05 EUR/PLN, but failed to do so staying in relatively tight range despite ongoing gains of global equity markets. Comments by central bank policy-maker Jerzy Hausner, who claims that current zloty weakness makes no reason to hike rates, should be more or less ignored. In the week ahead, the investors should wait for next series of domestic data including declining inflation and improving labor market conditions. Nevertheless for the zloty the critical impulse should come from starting US earnings season. If the bulls manage to stay on the stage, we may see the zloty to attack 4.00 EUR/PLN soon.

KBC