CE currencies feel some cautious relief

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Currencies: CE currencies feel some cautious relief
Fixed Income: Czech and Slovak markets are closed today.

Currencies

While it is still too early to say that the worst is over for the Polish zloty as liquidity conditions remain frail, the sentiment has indeed improved somewhat since early last week. We could see the EUR/PLN pair consolidate at current levels in calmer conditions this week unless extreme risk aversion returns to global markets. In general however, the most recent price action only confirms that it is the flight to and from safety (i.e. the dollar) which remains the major market mover for the PLN. This should remain the case in the days to come – while calmer trading is likely this week, spikes in volatility are likely to remain a permanent risk at least until the end of the year.

The Hungarian forint finished last week in a good mood as emerging market currencies performed better. The pair appreciated almost 2% during the day from 271-272 to around 265-266. Daily Vilaggazdasag reported Hungary’s low level of foreign reserve can be attributed as one reason why the IMF had to be asked for help. The level of €17.4bn was short of the €27bn maturing external debt within 12-months and this simple rule is often seen as guidance for the necessary level of foreign reserves. Market may be nearing the end of the recent weakening that was triggered by the outlook for a deeper global slowdown, which has now been widely accepted. Discussions about the budget and a fiscal rule will start in the Parliament this week followed by the central bank meeting next Monday.

Fixed income

Polish bonds headed lower in yields across the curve on the back of the stronger zloty. While liquidity has improved over the last while thanks to limited client flows, the inter bank market is still in near-deadlock and trading volumes remain subdued. The 5-10Y segment is likely to follow the zloty in the short run, so we could see calmer trading action in the days to come. At the same time rising rate cut expectations should help keep up the downward pressure on the short end of the curve. The barrage of (most likely softer) data this week (including wages tomorrow and IP on Thursday) will grab some attention, but are unlikely to be strong drivers for the market, which remains largely under the influence of shifts in risk aversion and their impact on the FX market.

Hungarian bonds also performed well on Friday on the back of a stronger currency and the benchmark 10-year yield lowered to below 10.00% again. The outlook is similar to the currency in general, thus the market is eyeing the news about upcoming events to judge the new inflation path.

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