EUR/HUF fails to break the 300 level, but koruna continues to loose

Headlines

Currencies: EUR/HUF fails to break the 300 level, but koruna continues to loose
Fixed Income: The Czech MinFin plans to test the market with 10Y benchmark in March

Currencies

Despite the weaker dollar and a slightly stronger forint the Polish zloty came under renewed pressure late on Monday. The EUR/PLN retested bids in the critical 4.50 area and while the zloty has so far been reluctant to head lower the risks seem to be skewed to the downside for the unit, given the soft global risk appetite conditions, local growth concerns, which could weigh heavily on company earnings and fiscal performance and the outlook for lower rates. This said we see little room for a broader improvement in sentiment for the zloty in the short and medium run.

The Czech koruna decoupled from the firmer forint yesterday and attacked again the technical barrier at 28.22 EUR/CZK, which is its 18-months low. There are no data scheduled for today and thus again the global and regional market sentiment will be in focus. According to our view the negative sentiment might persist, which could push koruna towards the new technical resistance, which we see at 28.8 EUR/CZK.

The Hungarian forint stabilized in the 295-300 range after the Prime Minister talked about ‘extreme volatility’ and held a meeting with the central bank about possible steps to stabilize it. This could have some short-term positive effect on the market, but we think global sentiment is more important and most recent developments of the yield curve may not help the HUF either. In the last years, there has been a strong link between the inversion of the curve and the currency. The currency had an appreciating trend when the gap between the short-end and the long-end of the curve exceeded 200bp and depreciated when it was below 100bp. The emergency 300bp rate hike last year widened this spread to 250bp followed by gradual appreciation of the currency in November, but central bank’s surprise rate cut in December and the cumulative 200bp easing between November and January reduced this spread to zero.

Fixed income

Polish bonds traded flat despite the disappointing FinMin inflation estimate and the slightly stronger than expected PMI reading for January. The Jan CPI is seen at 3.2% Y/Y, only slightly below 3.3% Y/Y in December, and visibly higher than the market consensus of 2.9% Y/Y and our preliminary estimate of 3.0% Y/Y. The FinMin has been wrong on several occasions though, and for now we stick to our expectations. The PMI edged up to 40.3 pts from the historical low at 38.3 in December, but remains well into negative territory, painting a bleak picture of activity in the months to come. While we could see some (technical) corrective action for Polish bonds in the zloty weakens further, the interest rate environment should underpin the drop in yields for shorter maturities while fiscal issues are likely to continue pointing toward a steeper curve.

Hungarian bonds were generally stable and the Prime Minister’s comments did not have any major effect on the market. They may however continue to suffer if rate cut expectations soften on concerns about the currency. This however seems to be an uncertain scenario as the central bank has not yet commented recent developments.

The trading with Czech bonds was yesterday quiet and yields remained around their current levels. Nevertheless it’s worth mentioning that the Czech Finance Ministry published yesterday the new emission calendar. The FinMin plans in March to auction 16 bn CZK worth of domestic government bonds in two primary auctions – 8 bn CZK worth of 8-year floating rate bond and 8 bn CZK worth of 10 year bond. This calendar confirms speculations that the auction of 5-year eurobond will be postponed. It is also worth adding that the FinMin’s plan seems quite daring given the fact that last auction of 8-year floater was not very successful and also the last auction of 10- year bond which occurred in September last year did not attract sufficient demand. Nevertheless, we believe that the situation is somewhat different now and both auctions might be subscribed this time. Today there are no domestic data scheduled for release and therefore the market will remain in a wait-and-see mode ahead of Thursday’s CNB meeting (from which we expect a 50 rate cut).

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