Pressure on the Hungarian forint intensifies

Headlines

Currencies: Pressure on the Hungarian forint intensifies
Fixed Income: Total volume of hedging losses 50-60bn CZK according to CNB

Currencies

The Hungarian forint reached a new low again at 316 despite authorities’ attempts to reassure investors that the banking system is stable. The financial regulator has also emphasized that it agrees with others in the region about ‘case by case’ assessment of the countries after market had a negative reaction to an ECSB statement from neighbors. Local rumour has spread within Hungary about government collapse in the next days and this may increase the risk of a bank run in Hungary, which is unfounded in our view, but panicky sentiment may allow such a scenario. If depositors start to convert forint accounts into euro, there may not be any further room left for the central bank, but to hike the base rate substantially again.

The differentiation story in CE is effectively being played out as the zloty weakened only slightly yesterday against the backdrop of the record-weak forint. The EUR/PLN eventually edged higher from 4.65 at the start of the session to 4.75, but has managed to regain and keep its composure since then. The overnight weakening of the dollar might support the unit today as well, which otherwise could have come under pressure from softer equities.

The Czech koruna joined the regional sentiment on Thursday. It seems that the effect of Sanofi euro conversion has slowly diminished. Hence the koruna tracked the sell-off in the region and came back to the 28.00 EUR/CZK area. Quite interesting comments were also widely ignored. The CNB estimates the total volume of uncovered koruna positions of Czech exporters at about 50-60bn CZK. This is not so worrisome, according to the Vice Gov. Miroslav Singer, because total exports are 2.46 trillion CZK. The negative sentiment on the Czech FX market may persist untill the end of the week as we do not believe the markets to recover significantly with the US payrolls release on the table.

Fixed income

The Hungarian bond market basically collapsed yesterday. Yields rose only marginally, but most primary dealers took such a big loss on trading that they stopped quoting prices to clients.

Polish bonds were little changed yesterday despite the weaker zloty and rising uncertainty regarding this year’s fiscal outlook. The FinMin acknowledged early today that the PLN 18.2 bn nominal deficit target may have to be increased “slightly” after the Jan-Feb deficit realization came in at 5.5 bn, i.e. roughly 1/3 of the annual plan, in the wake of the much weaker than expected economic growth. NBP president Sławomir Skrzypek followed suit as well early today saying that the budget would most likely need to be revised. The revision is likely to take place midway through the year we think and a new target of PLN 30-35 bn would be a reasonable, if not optimistic, compromise given the expected slump in (mainly tax) revenues. The market is unlikely to react to the news in the short run, although in the longer term perspective the stronger than expected rise in debt issuance may keep the downside for yields limited across the curve.

The Czech yield curve steepened in average trading volumes on Thursday. Yields lost up to 13 bps at the short end of the curve influenced by Bank of England and ECB rate cuts. The Czech market also expects a similar step at the end of March. However, the middle and long segments of the yield curve add about 4 bps. No fresh important domestic impetus is scheduled today. US payrolls are published shortly before the end of trading session and its impact may be limited. However, current long maturities yields at above 5% may be interesting for some investors and the yield curve could flatten slightly.

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