Hungarian forint plunges to new low

Headlines

Currencies: Hungarian forint plunges to new low
Fixed Income: Czech 8-year floater successfully subscribed

Currencies

The Hungarian forint set up a new all-time record low of 312 against the euro after regional central banks released a statement that they prefer case-by-case assessment of the regional countries instead of the proposed one-size-fits-all approach. This was a major blame to the Hungarian government as the Prime Minister suggested a huge €180bn rescue package for the region on the EU Summit. It seems that not just big EU countries, but also regional neighbours would like to differentiate themselves from Hungary. The reaction was quite obvious on the market as other currencies slightly appreciated, while the forint weakened. Improving equity market sentiment in the afternoon helped the HUF to recover to 307, but this could be temporary if country- specific fundamentals do not improve substantially.

The differentiation theme seems to have started to play out as the zloty and Czech koruna shot higher on HUF cross trades early yesterday. The joint statement by central banks in the region (ex-NBH) urging investors not to put all countries in one basket may have been the trigger, but in the end we think it’s the relatively decent fundamentals and strong agency ratings (today Moody’s pointed to Poland’s very high credibility compared with its regional peers) that will continue to underpin the zloty. With the EUR/PLN 4.70 mark broken to the downside, the road to 4.60-4.65 is wide open, particularly given the reversal in sentiment in core equity markets which could help fuel interest in assets in the region. As such, we remain positive for the day ahead, and keep to the cautious side in the slightly longer term perspective as market liquidity remains extremely low.

The Czech koruna posted very strong gains on Wednesday and ended close to the 27.30 area. That was partly due to the Sanofi Aventis conversions. The Pharmaceutical giant has started to convert approximately 1.1 bln. euro (according to market rumours) to buy the controlling share in the Czech pharmaceutical company Zentiva. Beside that, also the improved sentiment in the region and the lower risk aversion on the global markets helped the koruna to strengthen. Today might be a bit calmer due to the ECB meeting and the overall nervousness ahead of US payrolls. Nevertheless thanks to Sanofi, the koruna may still outperform the region today.

Fixed income

The Hungarian bond market saw yields rising some 10bps again, while the 5y5y forward spread remained at 380bps. The market is following the exchange rate as usually these days and this may continue for now.

Despite the stronger zloty Polish bonds traded flat early on Wednesday as the market geared up for the first primary auction this month. While the tender ( roughly PLN 3.2 bn worth of 2 and 5Y benchmarks were sold) was not a major success with the bid to cover ratio at approximately 2.0, the improvement in sentiment in the FX market was in the end enough to keep the secondary market from plunging lower. Today the FX market could lead the way for bonds – the swap curve has already edged lower as the stronger currency has again underpinned expectations for more monetary easing, which would point to the downside for bond yields, particularly at the short end of the curve. The ECB rate decision and comments will be eyed closely as well, but is unlikely to be a major market mover unless the widely expected 50 bp cut is not delivered.

On Wednesday the main event on the Czech bond market was the auction that should show how the Czech market is able to absorb this year’s issuances as previous auctions’ results were rather poor. Yesterday the Czech Finance Ministry sold CZK 8.36 bln. 8 year floating rate bond, i.e.more than scheduled CZK 8 bln. Demand picked up to CZK 10.7 bln. after last months’ auction was unsatisfactory with little demand. However, the ministry had to accept higher yields, the average one was 147.7 bps above current Pribor rate (2.63%), last month was 126.4 bps only with Pribor at 2.36%.

•   Download Full Central European Daily