Wide spreads keeps Hungarian bonds vulnerable

Headlines

Currencies: CEE currencies remain under pressure on US rescue plan
Fixed Income: Wide spreads keeps Hungarian bonds vulnerable

Currencies

The Polish zloty traded flat on the day, as renewed risk aversion kept the EUR/PLN pair well above the 4.50 mark on Wednesday. The soft performance in Asian equity markets suggests the region might come under more pressure today. We expect to see strong resistance at EUR/PLN 4.60, which if broken, would open the road to further weakening into the 4.70 area. The bear market may be over for now, but it seems that the chances for a full-blown zloty rebound remain limited and strictly dependent on the improvement in global sentiment. Today the December C/A numbers will get some attention, and while on paper our PLN 2.15 bn estimate of the headline deficit would be zloty negative, we doubt whether the release will be a major market mover. The CPI numbers tomorrow will be far more relevant in this respect.

The Hungarian forint continued to weaken further on Wednesday and the pair reached the 296 level from 293. There was no major domestic news, while the international backdrop remained more negative as risk aversion broadened among emerging FX markets. Today’s trading could be calm ahead of the key data releases on Friday (GDP and inflation) and before the government will reveal the fiscal consolidation plan on Monday.

The Czech koruna was unable to recover from its plunge on Tuesday and remained in a narrow band close to 28.5 EUR/CZK level. Risk aversion supported by infinite discussion about new U.S. stimulus package and negative news from the economy ensure that the koruna will lack the incentive to return to stronger levels. The doubledigit decline in industrial data suggests that the Czech recession already started. Bleak economic news and low rates will act against the koruna in the coming weeks.

Fixed income

Polish bonds were slow to react to the most recent weakening of the zloty, but eventually followed suit yesterday. Yields shot higher by up to 15 bps, with the sentimentdriven 5Y segment hurt the most. Today, the zloty will be eyed closely, as the market gears up for the all-important CPI numbers tomorrow.

Hungarian bonds lost some 10-20bps across the curve, but trading was generally calm. The sharpest move took place at the 5y5y forward IRS spread, which widened to record 350bps, underlying fundamental problems of the country which could delay the introduction of the euro by several years. Wide long-end spreads could also keep the currency and the bond market vulnerable to risk premia shocks from abroad.

Czech bonds yesterday followed their European counterparts and strengthened, but the long end of the yield curve was not able to maintain its gains, and finally ended 1.5 basis points higher than on Tuesday. Today, current account statistics are scheduled for release. In our view, however, the Czech fixed income instruments will mostly watch the development of European bond market.

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