EUR/HUF rebounds to the 300 territory, EUR/PLN is back above 4.5

Headlines

Currencies: EUR/HUF rebounds to the 300 territory, EUR/PLN is back above 4.5
Fixed Income: A 10Y benchmark auction – a key test for the Czech bond market

Currencies

The Czech koruna lost slightly in a volatile trading on Tuesday and closed at EUR/CZK 26.606 due to higher risk aversion. It is worth noting that Mr M.Singer, CNB board member, in his interview refused a coordinated help for Central and East European region. In case of the Czech Republic it might initiated an undesirable domestic currency strengthening. No domestic incentives are expected today, while more central bank talk will be probably shrugged off. Recall that Eva Zamrazilová of the CNB board said that the current appreciation of the crown is to a large degree the result of a general return of investor confidence in the entire Central European region. On the domestic level, though, she said there is still a crisis of confidence between banks that is keeping the interbank lending market frozen. She added that there is nothing to do in this respect other than to wait for the parent banks to announce their results and lay out all their problems. Hence the koruna could remain at a narrow band around the current level, but a small depreciation can not be excluded. However later on, the FOMC decision could change the mood eventually.

The Hungarian forint resumed the correction it started last Friday and the pair quietly slipped through the key 300 level. The weakening trend was pretty balanced during the day and the market closed at 302. The 50% correction rule would suggest that we may see it returning to around 308 soon as it would be the level at roughly halfway between the 317 bottom and last week’s 293 top. Detailed January industrial production figure repeated the 21% Y/Y drop we saw in December, while prolonged slowdown of the economy could mean that this year’s recession could be deeper around 5% instead of the government’s current 3-3.5% projection. Prospect of a deeper recession would bring back fears about the budget as it would lower revenues and eventually risk the below 3% target. The Finance Minister said that the government has a rescue package for such a scenario, so market’s may not be bothered too much about this, like what we saw in a similar case in Jan-Feb, but nevertheless this could keep the current weakening trend intact for the next days.

Fixed income

Polish bonds were again quick to react to the weakening of the zloty yesterday - the curve steepened in a bearish fashion with the long end up by 10 bps on the day. The consensus-like wage and employment numbers (5.1% y/y and -0.3% y/y respectively) were ignored. Our impression is that while evidence of economic performance continues to provide arguments in favour of further monetary easing, macro data will be of lesser importance to markets in the current environment. Nevertheless the February IP numbers will be eyed closely today. Our (revised) output estimate stands at - 15% y/y, following the stronger than expected car production data, and the risks seem skewed to the upside this time as anecdotic evidence and latest soft data suggest the worst in terms of the pace of deterioration is behind us. Whether these tentative signs are enough to support a no-action stance from the MPC remains to be seen. In general we think that given the level of uncertainty regarding the economic outlook the zloty will be the decisive factor for official interest rates (and hence also for the short end of the curve). The long end of the curve will remain sensitive to shifts in global risk appetite and will likely continue to follow the zloty.

The Czech bond market experienced another quiet session yesterday. No domestic incentives appeared and the market prepared for today’s auction. At the end, the yield curve steepened loosing near to 8 bps at the short end and gaining 10 bps at the long end of the curve. Today the main issue on the Czech bond market is the auction of 5.00%/2019 state bond in the volume of CZK 8 bln. It is the first this year’s bond issuance with fixed interest rates. The last auction offered 8-year float rate showed a solid demand but the Ministry of Finance had to accept higher yield. As European bond markets are saturated with plenty of bonds even this auction should accept a higher yield for investors. Today’s auction could be seen also as a test of sentiment for the Czech bond market and the Czech economy at all.

The Hungarian bonds suffered with the currency as usual these days and this time yields rose about 20bps. The most active 3- and 5-year segments are back to the 12% level and if the forint weakens further they may edge higher as well. The good news is that the long-term 5y5y forward spread has remained anchored around the 350-360bps level, well below the above 400bps level we saw two weeks ago, when the currency was at the same level. This could suggest that the market is taking into account the tighter monetary conditions implied by higher short-term rates and longterm outlook is now improving. In past experiences, this type of forward curve reaction has predicted turnaround in the bear market trend. Let’s see if we have this again this time.

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