Forint finds some ground after MNB's verbal intervention

Headlines

Currencies: Forint finds some ground after MNB’s verbal intervention
Fixed Income: MNB loads the rate hike gun

Currencies

The Polish zloty returned to the EUR/PLN 4.70-4.80 range yesterday as if to confirm that the time is not yet ripe for a major recovery for the zloty. Given that equity markets continue to head lower, the fact that the PLN has stopped weakening in the wake of the verbal interventions by the FinMin and central bank, should be seen as a positive signal in the longer term perspective. We expect more (calmer) range trade with some possible upside for the PLN the in the days to come and remain positive for the undervalued zloty further out in time once the sentiment in global markets starts to turn.

A series of important domestic macro figures (CPI, foreign trade, unemployment) had only minor effect on the Czech forex market, which moved basically sideways yesterday. All data were very close to the market consensus, so it was not surprise that the market was little impressed by the March foreign trade surplus, which was in fact much lower than the surplus 12 months ago. Today, both the domestic and foreign calendar is empty so, the koruna will rather watch other markets – especially the Hungarian and Polish forex market, which might give some guidance.

The forint fought back in recent days, after it reached the all-time low at EURHUF 317/€. The central bank fearing a collapse held two extraordinary council meetings on Friday and Monday. Some €1bn EU funds will be channelled into the fx market and the governor said that rate hikes are a tool that might be used. The PM also quietly suggested last week that more measures could come. The smaller opposition party MDF elected ex-finmin Bokros as leader of the European Parliamentary election list for June and proposed a constructive no confidence vote against the PM as soon as possible. Why have policymakers become so active? As usual, it was triggered by market turbulence; bonds yields at sky high levels, the 5y5y forward spread sharply higher and the FRA market looking for almost 200bps rate hike to 11.5%. Such a big hike would mean that the central bank takes back the full monetary easing and set the base rate back to its October level. Given that Romania and Ukraine kept money market rates close to the record high levels they spiked to last autumn, this looks a plausible scenario to us. The CZK and PLN seems to have had a U-turn after central banks talked about excessive volatility and possible steps, so the regional pressure may have been easing on the HUF as well. If country-specific factors remain the main issue behind the forint, monetary tightening could be successful in our view. The CZK rallied some 8% since mid-Feb, a similar move would mean 290/€ for EURHUF. This was the level the IMF program foresaw last October. The Central bank's willingness to hike is usually the main uncertainty in Hungary, so we will look for any further information ahead of the March meeting and if these confirm a rate hike, we would bet the forint may outperform in April.

Fixed income

Polish bonds traded higher in yields yesterday as the strong demand for 26 and 52 week treasury bills at yesterday’s auction spurred doubt regarding whether the market would see longer term bond issuances attractive in the foreseeable future. Risk assessment and low market liquidity has kept investors away from buying into bonds even in the 2Y segment, and while we see significant upside potential for prices at the short end of the curve as interest rates continue to drop, trading is likely to remain sentiment driven for now. And the sentiment, it seems, has turned from neutral to slightly negative over the course of the week as fiscal issues hit the agenda and as risk aversion remained elevated.

The Czech bonds showed only limited moves in low liquidity trading at the beginning of the week. The short end outperformed the long one, which could have been thanks to the better than expected inflation. Consumer prices in February rose only 0.1% m/m. On the one hand, prices of fuel and tourist tours increased, on the other hand certain food stuff became slightly cheaper. The prices also reflected medical fee payments in the regions. The inflation figures are positive. The Czech inflation is very likely above 2.0% y/y for the last time this year. It may decline further. Especially food prices might go down as there has been a brutal drop in agricultural producer prices. The inflation outlook remains also well below the objective of CNB. The only risk to inflation is the weaker koruna, the main reason some vendors mention when they increase prices. Today the domestic calendar is empty hence the Czech market may track the development of the German bund, at least at the longer end of the curve. The shorter maturities should be more stable.

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