Review 

  • Fitch raised its outlook on Russia’s credit rating to stable from negative and affirmed its long-term foreign and local currency issuer default rating at ‘BBB’. This reflects greater confidence in economic and financial stability after the surge of oil prices. 

  • Russia's Finance Minister Alexei Kudrin, at the conference on the modernization of the Russian economy, said that Russia needs to reach a budget deficit of no more than 1% of GDP after 2012, with the government restraining strong expenditure growth in order to fulfil this target. In our view this is a very ambitious target that would be difficult to reach even over the medium term. Kudrin also said that Russia may consider selling crude oil in roubles rather the US dollars, but this would take some time. This is not the first time Russia has suggested moving to roubles for oil sales, but it wouldn’t be feasible in the short term. 

  • Lithuanian finance minister Ingrida Simonyte said that euro adoption wouldn’t be possible any earlier than 2014. This is a relatively ambitious plan, as the government would have to bring the fiscal gap to within 3% of GDP by 2012. This would be hard to achieve without broad political consensus.


Preview 

  • The main event in the CEE today is undoubtedly the Hungarian rate decision. A 25bp rate cut is the most likely outcome, but we see a definite risk for an unchanged rate.

Trading Update 

  • Our EMEA FX Scorecard has once again turned negative mostly due to the lower total score for global conditions. The combination of a global recovery that is losing steam and a less supportive global monetary environment provides less favourable conditions for EMEA FX. This, in our view, is a pretty clear signal that the sell-off in EMEA currencies could accelerate going into this week. Our trade of the week based on our EMEA FX Scorecard is buying PLN/HUF. 

  • The reason that we see upside risk for rates in Hungary today is the potential effect on the HUF that a rate cut could have (although it is largely expected). Risk aversion in the European fixed income universe is on the rise with the Greek troubles, and the Hungarian central bank needs to avoid a spike in the EUR/HUF. Not cutting the rate could be such a measure. Still, a cut is the most likely scenario. We remain receivers in 2yr CZK swaps in spreads against HUF.