Czech government bonds headed for their biggest weekly rally on record as investors stepped up bets the country will cut interest rates.
The yield on 2017 koruna notes slumped 25 basis points, or 0.25 percentage point, in five days to 1.18 percent by 5:04 p.m. today in Prague, set for the lowest close and steepest weekly drop since Bloomberg began tracking the generic index in 1997.
Data this week from the euro area, the biggest buyer of Czech exports, and Japan signaled a deepening economic slump. The Czech National Bank may further lower its forecast for gross domestic product and rate cuts toward zero cannot be ruled out, board member Lubomir Lizal said on Aug. 19.
“Central bankers’ dovish comments are prompting the market to bet on further interest-rate reduction” while “demand for Czech exports will probably keep waning,” Jan Bures, an analyst at CSOB AS in Prague, wrote in a report today.
Forward-rate agreements fixing interest in February fell to 45 basis points below the Prague interbank offered rate today, the strongest bet on monetary easing since at least March 2010. November FRAs traded 26 basis points below the interbank rate.
“We expect the policy rate to be cut to 0.05 percent before the end of 2012 after a 25 basis-point cut to 0.25 percent on Sept. 27,” Jaromir Sindel, a Prague-based economist at Citigroup Inc., wrote in a report to clients yesterday.
The koruna strengthened 0.2 percent to 24.861 per euro, reversing earlier losses after Standard & Poor’s affirmed today the country’s AA- rating, four steps above Italy and Spain, with a stable outlook. S&P said that Czech “financial, monetary, and economic institutions remain robust and stable, enabling the prosperous economy to adjust quickly to adverse shocks.”
The Czech currency has appreciated 1.9 percent this month versus the euro, the second-most among major emerging-market peers tracked by Bloomberg, after Romania’s leu and followed by the Hungarian forint and Poland’s zloty. The recent gains make the central European currencies the most “vulnerable” to a worsening of the euro area’s debt crisis, strategists at Societe Generale SA wrote in a report to clients today.
“We can’t rule out a correction for the koruna to back above 25 per euro,” Bures said in the CSOB report.
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