Latvian budget cuts help to stabilize the region

Headlines

Currencies: Latvian budget cuts help to stabilize the region
Fixed Income: Polish finance ministry cancels long-dated auction

Czech Republic

The Czech koruna firmed yesterday as worries about Latvia’s devaluation eased in a bit and the Czech April trade balance showed a significant surplus (CZK 12 bn). As a result the EUR/CZK pair dipped back below the 27.0 level.

Today, the domestic forex market has to digest the detailed structure of GDP figures for the first quarter and the May inflation figures. Both reports were basically in-line with expectation as the GDP structure showed that the negative figure was caused particularly by weak net exports and investments, while the year-on-year inflation dropped to 1.3 % in May. These figures were close to market expectations, hence the market will no react to them and it will continue to monitor Latvia’s story and the behaviour of the dollar on global markets.

The Czech yield curve tracked core bond markets and flattened in bearish fashion at the start of the week. The only negative domestic factor was the May employment figure, which showed the unemployment rated remained flat during that month.

Today, the calendar is well packed as the CSO released the detailed structure of the GDP figures for the first quarter and especially the May CPI figures. As concern the GDP details the only surprise might be a relatively strong growth of household consumption (3.0 % y/y), which could signal that domestic demand has not been so weak (may be also because of heavy shopping of non-residents). As concern the May CPI – it came exactly in line with expectation as the year-on-year figure dipped to 1.3 %.

Both figures should not be strong stimuli for the market while the relatively strong consumption might generate some upward pressure on the bond yields. The bearish sentiment on core bond market should play a strong role in this respect, too.

Hungary

The Hungarian forint recovered sharply late in the afternoon as receding fears about the Latvian currency devaluation also eased the pressure on the local currency. The weekend’s EU Parliamentary election results brought an overwhelming majority for the right-wing parties. Opposition Fidesz won with 56%, a new EU wide record high result, while the radical right Jobbik won 3 seats with 14% of the votes. Governing Socialists suffered a major defeat together with ex-coalition partner liberal Free Democrats. The smaller conservative party MDF got 1 seat and finished above the 5% threshold that would allow them to enter into the Parliament next year.
Markets did not worry too much about domestic politics and likely the current government will hold on to the general elections next year.
Overall, the currency relief brought the exchange rate back to 283-284, up from about 288-290 last Friday.

The Hungarian bond market has a bit lagged behind the currency as yields remained high above 10.00% despite the stronger HUF. It seems that global inflation fears and rising core market yields have been feeding into the Hungarian market slowly, but steadily.The inflation outlook is also negative in Hungary in our view, so bonds are not really attractive now.

Poland

Polish zloty strengthened in a rather quiet session at the beginning of the week. The currency appreciated the news from Latvia, where the government is prepared to make additional budget spending cuts by nearly 1 bn. USD. There could be a certain positive spill-over from the Polish bond market. Polish finance minister cancelled the long-dated auction initially scheduled for Wednesday saying it has already sold enough during last two months.

The rest of the week is rather empty on the Polish scene. We think the pair should follow global equity markets and the Latvian story. We continue to believe that at these levels there is not much room for further weakness on the Polish FX market.

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