January 4, 2019 / 10:53 AM / 6 months ago

CEE MARKETS-Crown hits 3-month high, shrugging off low CEE price indices

    * Czech cbank minutes confirm weak crown could lead to rate
    * Crown extends rally, setting  3-month high
    * Government bond yields track partial rebound in core

    By Sandor Peto and Robert Muller
    BUDAPEST/PRAGUE, Jan 4 (Reuters) - The crown hit a 3-month
high as investors priced in further Czech monetary tightening
even though a batch of Central European inflation data showed a
further easing on Friday.
    Minutes of the Czech central bank's (CNB) December meeting,
where it kept interest rates on hold after four consecutive
hikes, were less hawkish than some had expected.
    But market participants said the text confirmed a link
between crown weakness and further CNB interest rate tightening
if needed to fight inflation.
    The crown touched its strongest levels since late
September at 25.58 versus the euro, before retreating to 25.623
by 1000 GMT, still up 0.2 percent on the day.
    That is still significantly weaker than the CNB's average
forecast of 25.1 for the first quarter, therefore "there would
be space for raising rates," one Prague-based FX dealer said.
    Czech inflation, which ran at an annual rate of 2 percent in
November, will "accelerate markedly" early this year, said
Komercni Banka analyst Viktor Zeisel in a note. 
    "We stick to our expectation that rates will go higher at
the (CNB board's) February meeting," he added.
    Price index figures released elsewhere in the region on
Friday showed that inflation pressure continued to ease late
last year.
    Poland's annual inflation dipped further below the central
bank's 1.5-3.5 percent target in December, to 1.1 percent as
    Hungary and Romania's producer price indices fell in
    Government bond yields have plunged across the region in the
past weeks, flattening  curves,  due to the decline in
inflation, while increased worries over global economic growth,
particularly in the United States and China, pushed interest
rate forecasts lower.
    In the United States, the futures market has started to
price in a cut as the Federal Reserve's next interest rate move
rather than further hikes.
    Government bond yields in developed markets, however, rose
on Friday, correcting an earlier sharp decline and triggering a
similar movement in Central European long-term bond yields.
    Poland's 10-year bonds traded at a yield of 2.126 basis
points, rising one basis point but outperforming German Bunds,
where yields were 3 basis points higher. 
    "The bond markets (in Central Europe) have started to behave
as safe havens," one Budapest-based fixed income trader said,
adding that if global economic growth worries persisted, Central
European bond yields could continue to fall.
            CEE       SNAPSHOT   AT                         
            MARKETS             1100 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2019
 Czech      <EURCZK=   25.6230   25.6720    +0.19%    +0.33%
 crown      >                                       
 Hungary    <EURHUF=  321.2000  321.2000    +0.00%    -0.04%
 forint     >                                       
 Polish     <EURPLN=    4.3022    4.2912    -0.26%    -0.29%
 zloty      >                                       
 Romanian   <EURRON=    4.6640    4.6620    -0.04%    -0.21%
 leu        >                                       
 Croatian   <EURHRK=    7.4340    7.4335    -0.01%    -0.32%
 kuna       >                                       
 Serbian    <EURRSD=  118.3000  118.3700    +0.06%    +0.00%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2019
 Prague                 998.57  990.0500    +0.86%    +1.22%
 Budapest             39863.08  39672.60    +0.48%    +1.85%
 Warsaw                2274.88   2247.22    +1.23%    -0.08%
 Bucharest             7538.08   7471.10    +0.90%    +2.09%
 Ljubljana  <.SBITOP    800.79    805.06    -0.53%    -0.43%
 Zagreb                1727.66   1729.91    -0.13%    -1.21%
 Belgrade   <.BELEX1    732.23    731.79    +0.06%    -3.87%
 Sofia                  584.21    585.33    -0.19%    -1.72%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.8700    0.2460   +248bps    +24bps
   5-year   <CZ5YT=R    1.7520    0.0940   +208bps     +7bps
   10-year  <CZ10YT=    1.7620    0.0350   +158bps     +1bps
   2-year   <PL2YT=R    1.4360   -0.0030   +204bps     -1bps
   5-year   <PL5YT=R    2.2440    0.0220   +258bps     +0bps
   10-year  <PL10YT=    2.7510    0.0360   +257bps     +1bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.10      2.19      2.21      2.01
 Hungary                  0.28      0.49      0.75      0.13
 Poland                   1.74      1.74      1.75      1.72
 Note: FRA  are for ask prices                              
 (Reporting by Sandor Peto; Editing by Kirsten Donovan)
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