Hungarian bonds under selling pressure

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Currencies: CE currencies unable to profit from USD weakness
Fixed Income: Hungarian bonds under selling pressure

Currencies

The Fed’s liquidity boosting action caused only a temporary boost to the Hungarian forint and the currency resumed its weakening trend yesterday. The Polish unit did the same, so there seems to be some kind of general depreciation of emerging currencies. Stronger Japanese yen and sharp moves on global markets could have triggered reduction of risk appetite, but some may also say that recent bond market rally drove yields too low and the forint needs to offer higher carry than the current levels. The market has priced out most of the rate hikes it had foreseen earlier; hence the central bank meeting next Monday will have an important role. Vice Governor Karvalits said that January’s rate cut may have been a mistake in a retrospective assessment, though they did not know that the region would face that kind of capital outflow.

The zloty fell victim to aggressive profit taking on Thursday as the EUR/PLN pair headed from 4.52 in early trade to 4.62 late in the day. The softer global equity market performance suggests the move was in part related to weaker risk appetite, although local market factors might have played a role as well. The termination of toxic FX hedges has kept the downside for the PLN limited and we think that this will remain the case in the foreseeable future even though fundamentals remain positive for the zloty.

Despite heavy USD losses, the Czech koruna was only little changed yesterday. The counterbalancing factor, which worked against the koruna were both the ongoing weakness of the Polish zloty and activity of export companies, which at least partly close their (previously) hedged positions. Today, the domestic calendar is empty and the foreign oner does not look attractive. Hence, we think the koruna might develop a sideways trading pattern and stay in wait-and-see mode ahead the Central bank meeting next week.

Fixed income

Negative sentiment weighed on the Hungarian bond market as well. The long-end was sold off especially visible and yields spiked by about 40-50bps back to the historic high level we saw some 2-weeks ago. This means 12% for the 10- and 15-year segments. The 5y5y forward spread has widened from 350bps to 375bps, still below the 400-430bps range we saw back then, but current levels are still very wide in a historical context, therefore this can be interpreted as worrying sign about future inflation path.

Polish bonds were reluctant to follow core markets lower in yields on Thursday following the Fed announcement the day before. In turn the weaker zloty suggests some upside for yields may be in store for the long end of the curve ahead of the weekend. The February core inflation numbers will be released later today, but they are likely to be of lesser importance to markets, particularly since the detailed CPI numbers are already available.

The Czech yield curve, in thin trading volumes, flattened on Thursday. The market was still digesting Wednesday’s 10-year paper auction, which was successful, sending the longer yield’s segment higher, but yesterday’s trading corrected this move. The short end of the curve was influenced by diminished rate cut expectation at the nearest CNB meeting next week. No domestic incentives are scheduled for today, ahead of the weekend we expect a quiet trading season as the market slips into a wait-and-see mode ahead the CNB meeting next Thursday.

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