COBA CEE Strategy Weekly

Over the last week the CEE local bond market performance was flat, on
indication that economic growth is turning stronger globally, while US rates
and yields are creeping higher. This is suggesting that the looser monetary
cycles may continue to be re-priced in Central Europe. We argue, however,
that forward looking real interest rates are still high in Poland and
Hungary and keep the high yield market overweight, in slightly longer (mid)
duration. The growth outlook is likely to be conducive to further risk
taking, and with correcting money market rates in the low-yielders, more
supportive of the CEE FX.

Market technicals: We see the downside target on the HUF at 244.30/EUR. The
PLN may advance towards 4.03 and possibly 4.00/EUR, however we would look
for signs of weakness from here. The CZK is sidelined between
29.72-30.63/EUR, we expect it to head towards 29.75

HUNGARY: The Hungarian market performance remains strong, in line with a
positive interest rate outlook. Domestic institutions are likely to be
upgrading portfolios and extending duration, as a number of uncertainties
have been resolved (pre-election fiscal loosening taking a more benign form
of tax cuts, which also slashes 2006 inflation by around 1%). The AKK will
be heavily redeeming debt in Aug/Oct. We extend duration to the mid-curve.

POLAND: We still think FRAs are cheap (3x6 4.43%) and the rate cut cycle
will be extended further, given the prevailing high level of real interest
rates, which should support inflows to PGBs, and the PLN. We would, however,
reduce PLN exposure below 4.00/EUR given the volume of non-resident
exposure.

CZECH REPUBLIC: We stay short duration as the market may continue to
re-price the CNB interest rate outlook. The new Inflation Report and the CNB
minutes (Thu./Fri) will shed more light on the scale of this. We do not
expect the CNB to spell out much danger, but a gradual shift in the money
market may continue as inflation drifts higher in H2 2005. A more supportive
money market profile, bullish C/Acc. perspectives should help the CZK
break into a stronger range.

SLOVAKIA: We keep the SKK as a mid-term buy, despite its recent under
-performance. Risks on medium-duration are rather benign, against a sound,
EMU compliant 2006 budget draft (2.9% GDP ex-pension) and growing
structural /institutional demand. The NBS has not turned more hawkish in
July, but remains vigilant with respect to the 2nd round impact of the
upcoming energy sector price deregulation. We see money market rates
adjusting closer to 3% in H2 2005