NBH stays on hold as expected

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Currencies: Coordinated intervention helps to stabilize CEE currencies
Fixed Income: NBH stays on hold as expected

Currencies

The Hungarian forint was helped by the central bank relatively hawkish stance that left the base rate unchanged and echoed the words of other regional central banks citing excessive currency volatility as harmful. These comments were supportive for the forint and lifted it to as high as 293 early in the afternoon, a roughly 3% intra-day appreciation before correction kicked-in and the pair slipped back to 297-298. The money market has been looking for 50-75bp rate hikes, which could lend additional support to the currency, but central bank has a relatively dovish track record, so tightening may come only if it becomes unavoidable.

The Polish zloty extended last week’s gains early on Monday after central banks in the region came out with an (apparently) coordinated verbal intervention to support the battered currencies. The NBP president Sławomir Skrzypek indicated that the bank would consider action to curb exchange rate volatility that has been the source of negative feedback in the broader economy. Coordination might help boost the impact of verbal intervention, however, we doubt whether central banks will be able to restore confidence by talk alone. Direct intervention seems unlikely in Poland as this would only erode FX reserves and could fuel fiercer speculation against the zloty. All the same, NBP rate hikes seem a very distant prospect as well, given the relatively high level of nominal and real interest rates and the weakness that lays ahead in the economy. This said it seems that while yesterday’s move might be appreciated by the zloty in the short run, it is far less likely to have a lasting positive impact on the troubled risk-oriented market in the longer term perspective. It would be good to see trading conditions calm down somewhat, although given the extremely shallow market, we may very well see more volatile price action in the days to come.

The coordinated intervention of the CEE central banks and the stable Hungarian interest rates helped the Czech koruna to trim some of the previous losses. The koruna briefly broke the 28 EUR/CZK barrier yesterday after the governors of the Czech, Polish, Hungarian and Romanian central banks joined together to take a stance against their countries’ rapidly depreciating currencies. CNB governor Zdenek Tuma told Reuters that he and his colleagues share the view that the exchange rates do not correspond to the economic reality. He said that the currencies had overshot and that the CNB might raise interest rates. The koruna initially appreciated to about 27.98 EUR/CZK but slipped later to 28.33, compared to an opening value of EUR/CZK 28.80. Today the session seems to be less optimistic as the sentiment on the global markets sharply deteriorated overnight. Hence we bet the pair may try to come back below 29.00 EUR/CZK.

Fixed income

Hungarian bonds rallied with the currency and yields dropping sharply by about 30- 50bps and bond yields moved away from the historic high levels we saw last week. The 5y5y forward spread has also narrowed back to below 400bps, suggesting that the current convergence can be more sustainable than earlier relief rallies. If the currency stabilizes around the current level, the high yield environment could become attractive and may attract capital back into Hungary, which could ease the pressure on local markets.

Polish bonds traded lower in yields for shorter maturities as the stronger zloty fueled expectations for policy easing in the months ahead. The retail sales numbers at 10:00 CET will be the highlight of the session today, as the market continues to weigh the arguments in favor and against a rate cut tomorrow. The reading should be the strongest of the data mix in January, given the tax cuts and the drop in inflation, although consumer confidence has taken quite a severe blow already, and the risks are skewed visibly to the downside not only for foreign, but also now domestic demand. Hence, along with the projected (and unprecedented) rise in unemployment in January to 10.5% (from 9.5% in Dec) the release should be, if anything, supportive for shorter tenders.

While Czech government bonds with longer maturities firmed yesterday, the short end of the yield curve responded to the comments of governor CNB Tuma and moved upwards (the yield 2Y government bond rose by 9 basis points). The statement of governor of CNB forced us to change our main scenario concerning interest rate outlook. We believe that CNB at its next meeting will leave rates unchanged and next decision will be highly dependent on the development of the Czech koruna. There are no data scheduled for today. We believe that weakening koruna will push bond yields upwards.

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