Moody's and Fitch downgrade Hungarian debt

Headlines

Currencies: CEE currencies try to regain some ground as global equities gain
Fixed Income: Moody’s and Fitch downgrade Hungarian debt

Currencies

The Hungarian forint closed the week in a weaker tone as emerging markets were on the back foot due to the prospect of a deeper global slowdown. The pair started with an initial weakening to 265, but news about downgrades pushed it further to 270 for a short-period. Moody’s downgraded the sovereign foreign currency rating to A3, while Fitch followed this over the weekend by downgrading to BBB. Moody’s kept the negative outlook, while Fitch changed it back to stable citing mainly the IMF program. Tomorrow’s inflation report may also influence the market as rate cuts have been priced in recently after the emergency 300bp hike three weeks ago. Consensus is looking for 5.2% Y/Y reading, while we estimated 5.4% due to the currency’s weakness. A higher inflation reading would support the maintenance of the 11.5% base rate for longer and thus could support the currency.

The Czech koruna stayed in tighter range 25.10-25.20 EUR/CZK on Monday. It reflected lower volatility on the EUR/USD pair and its ambiguous reaction to the US payrolls release. We believe the beginning of the week to be slightly positive for the Czech currency as the equities are set to open higher after Chinese plan to support domestic demand. Further decline in domestic inflation is widely expected and thus should be ignored. From the technical point of view the koruna may test the possibility to break back below 25.00 EUR/CZK.

The EUR/PLN pair shot past the upper bound of the recent 3.50-3.60 range late last week and despite tentative attempts the unit failed to muster enough strength to return below 3.60 on Friday. Today Polish markets resume trading for one session ahead of the national Independence Holiday tomorrow. Local activity should be limited with many traders off for the entire weekend. Nevertheless the fairly strong performance in equity markets suggests that the downside for the zloty will be well protected despite the tight liquidity conditions.

On Friday, the Slovak koruna was locked in a tight range around the level of EUR/SKK 30.40 as there was no impetus to drive the price action. This week will be busy with the market focusing mainly on the October inflation data and preliminary figures of Q3 GDP data. The other data will be also interesting (foreign trade or wages), but they should not be the main driver for the currency pair. The koruna is expected to continue to move in a tight range close to current levels.

Fixed income

Hungarian bonds followed the currency as usual these days and the mid-part inched back to 12.50-13.00%, while the 10-year bond yield rose to above 9% again at 9.26%. There is not much to say beside the currency as the story is very similar.

Polish bonds came under pressure from the weaker zloty early on Friday before rising back to pre-opening levels late in the day. The currency will lead the way for the market in liquidity conditions which were already tight, and will be even less supportive today as the market opens for a brief one-day spell ahead of the national holiday tomorrow. If the PLN keeps its foothold we could see bonds gain today and on Wednesday as the market reopens after the long weekend. The eco calendar heats up in the second half of the week with the all-important CPI release on Friday which should grab some attention and might lead to a further bullish steepening of the curve.

Czech bonds lost slightly on Friday and the yield curve, with above average trading volumes, flattened. No important domestic events were released, however, the weakening koruna decreased the pressure for interest rates even when FRA and Pribor rates continued their way down. Unemployment and inflation are released today. While unemployment has only little impact, lower October inflation may support rumours about further easing monetary policy. Nevertheless, the morning development on core markets could support yield increase at the beginning, later on lower inflation could change the trend and send bond prices up especially at the long end of the curve.

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