Headlines
Currencies: CEE currencies weaken on rise in global yields
Fixed Income: Polish central bank stays on hold, but cuts the required reserve rate
Poland
The Polish zloty weakened slightly after the NBP meeting. The central bank stayed on hold as expected, but surprised by cutting the required reserve rate for commercial banks to boost lending and support domestic demand. The Central bank governor Skrzypek confirmed that the bank is still in an easing cycle. Although there are for sure members convinced that rates have already reached the bottom (Dariusz Filar), we believe that the new inflation forecast and worse than expected macro figures (mainly 1Q GDP) help the NBP to cut rates in June.
Today the zloty should stay in wait and see mode ahead of Friday’s first quarter GDP. The nervous sentiment on the global markets should keep the Polish currency in slightly negative territory. The zloty does not feel comfortable especially with the sharp growth in global yields.
| Currencies | Close | change |
| EUR/CZK | 26.77 | 0.4% |
| EUR/HUF | 285.9 | 1.8% |
| EUR/PLN | 4.498 | 2.1% |
| USD/PLN | 3.204 | 2.2% |
| EUR/USD | 1.385 | -0.8% |
| USD/JPY | 96.1 | 0.9% |
| Bonds 2Y | Close | change |
| Czech Rep. | 2.93 | 0.01 |
| Hungary 3Y | 10.26 | -0.08 |
| Poland | 5.69 | 0.02 |
| Slovakia | 2.71 | -0.12 |
| Eurozone | 1.52 | 0.07 |
| USA | 0.95 | 0.01 |
| Bonds 10Y | Close | change |
| Czech Rep. | 5.47 | 0.10 |
| Hungary | 10.15 | -0.05 |
| Poland | 6.40 | 0.04 |
| Slovakia | 5.22 | -0.18 |
| Eurozone | 3.68 | 0.02 |
| USA | 3.69 | 0.15 |
Hungary
The Hungarian forint resumed weakening as dovish central bank views in the region left investors unconvinced about price stability. The HUF depreciation accelerated quickly overnight and the pair dropped more than 2% from yesterday’s level of 281 to 286-287.
The central bank inflation report showed a relatively optimistic outlook on inflation by saying that CPI rate could remain below 7% at the year-end. Taking into account the roughly 3-3.5pp impact from the VAT hike in July, this implies an underlying inflation path of around 2-3% or below the 3% medium-term target. Global concerns about inflation and debt burden could weigh on carry trade currencies for longer and this may not favour the forint neither.
The Hungarian bond market followed the currency and yields rose another 10- 20bps. Yields are therefore back to above the 10% level. Ballooning debt in core markets and rising yields could also weigh on the Hungarian market for longer, so investors may stay cautious for now.
Poland
The Czech forex market experienced another boring session yesterday. The decision of the Polish central bank had no impact on the Czech currency, so the EUR/CZK pair remained flat around the 26.7 level.
Although the firming US dollar and weakening of the zloty might bring some negative noise to the Czech market, we expect another relatively quite session. Concerning domestic events, the market will probably wait for tomorrow’s flash estimate of the April industrial production figures. In our view, they should again come out very weak despite positive effects of German scrap subsidies and their positive impact on Czech exports.
Rate cut hopes and the stable Czech currency still support the front end of the Czech yield curve, which continues to steepen. Interestingly, the long Czech bonds do not track sell-off on core bond markets, hence the spread between long term Czech and German yields actually tightened.
Should the koruna remain stable, we think that yield curve volatility will be also very low, hence Czech bonds will not track big swings in core bond markets. Let us add that the domestic calendar is empty today, while tomorrow’s flash estimate of the April industrial production figures might grab some attention.
