CEE currencies gain on equities rally, Swiss bank intervention

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Currencies: CEE currencies gain on equities rally, Swiss bank intervention
Fixed Income: Czech ministry of finance offers 5% coupon for 10Y maturity

Currencies

The Polish zloty extended this week’s already impressive rally on Thursday, adding an impressive 10 figures (ca. 2% for the EUR/PLN) to the gains in one day alone. Risk appetite has returned to markets, it seems and the zloty has been making full advantage of the fact along with other currencies in the region. EUR/PLN 4.50 is now the next major target and given the strong performance in Asian and US equities overnight, we could see the support level attacked or even broken today. Yesterday’s SNB rate cut and (supposedly) FX intervention stunned markets as well and contributed to the improvement in sentiment in other crosses after the CHF/PLN plunged by over 20 large figures from 3.14 to 2.93. The move, if it proves sustainable, is likely to receive a warm welcome from consumers who had taken out Swiss frank denominated mortgages, and banks which had been hard hit on the regulatory capital basis by the inflation of the FX denominated loan portfolio. As such it seems that while the sustainability of the most recent up-move for the PLN is largely dependent on the sentiment in equity markets, the strengthening of the currency itself could be a supportive argument for the depressed financial sector in Poland, and could add to the upside in the domestic stock market.

The Czech koruna got as far as 26.33 EUR/CZK during yesterdays session. The strong gains were triggered mainly by the optimism on the global equity markets. Beside that, also the intentions of the Swiss central bank to weaken the frank and the subsequent outflow of the liquidity from Switzerland could have helped the region as well. If the global optimism stays in place today, we may see the koruna testing 26.00 EUR/CZK. Our view for the year end remains unchanged at 24.30 EUR/CZK.

The Hungarian forint continued its recently started appreciating trend on Thursday and appreciated to 294 from 306. The market had a mild intra-day correction to 309 in the morning session, but better global sentiment together with the Swiss National Bank decision to cut rates and intervene in the FX market were able to resume the trend. The foreign trade deficit was worse in January as the market was looking for a small deficit and the actual data showed almost €200m gap, but participants did not take this too seriously as the currency has weakened substantially since then and export downturn could also have been quicker. All this would mean that foreign trade could improve in the coming months as import deceleration kicks in, while export stabilizes (the M/M seasonally-adjusted export data was actually tad above the December level).

Fixed income

Polish bonds were again quick to react to the impressive extension in the zloty rally. Rising risk appetite was supportive for the long end of the curve and the scale and pace of the PLN appreciation stood behind the recovery in rate cut expectations, pushing the so far resilient shorter term rates down as well. In fact, the curve steepened visibly - yields dropped by roughly 10 bps in the 5-10Y segment and up to 15 bps for the 2Y benchmark. Until recently we had been skeptical on the prospect of a rate cut this month given the risk of further currency depreciation. However, if the zloty manages to hold on to the recent gains, we would have to bet on 25 bp reduction already in March, instead of the pause. Today the official February CPI reading will take to the center stage (14:00 CET), and the second-tier C/A data will catch some attention. We are looking for a 3.4% y/y headline CPI reading, with the market consensus at 3.3% y/y and higher fuel prices contributing most tot the rise from 3.1% in January. Unless the reading comes in above our already elevated estimate, we doubt whether it will put the market off in terms of the zloty-driven rate cut expectations. Hence the data should be neutral for bonds.

The Czech yield curve, in slightly thin trading volumes, steepened yesterday and the stronger Czech currency caused a drop at the short end of the curve. Also expectations that pressure to European central banks to lower interest rates might influence also CNB, added to support interest for short maturities. Moreover, Ministry of Finance announced yesterday that set coupon to 5.00% for auction of the 10 year’s paper emitted next week. The current account release might hardly influence the Czech market today. However, expectations that CNB could lower interest rates together with stronger domestic currency may keep interest in bonds especially at the short end even today.

The Hungarian bonds rallied with the currency again as yields lowered by about 30- 40bps. There is not much difference from the currency market, so for long-term investors current levels may be attractive, while risk averse players may remain on the sideline until volatility declines.

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