CEE currencies extend gains on improved regional sentiment

Headlines

Currencies: CEE currencies extend gains on improved regional sentiment
Fixed Income: Hungary may not need the IMF financing next year

Czech Republic

The Czech koruna extended its rally week as the EUR/CZK as worries about Latvia’s devaluation eased and sentiment in emerging markets improved further. On the other hand fresh fundamental figures (GDP details plus the May CPI) did not bring much noise as they came out basically in line with expectations. So, the EUR/CZK pair moved southwards touching the 26.70 level. Interestingly, the Czech currency recorded rather strong gains against the USD.

Given the lack of domestic events the koruna will watch at other markets for guidance (global equity markets plus the EUR/USD). If the optimism in emerging markets remains, the EUR/CZK might head further south reaching the support level at 26.53.

Although inflation dropped significantly (to 1.3% Y/Y) in May, the outcome was in line with market expectations, so the reaction of the fixed-income market was only modest.

The swap curve experienced a butterfly shift as the front and long end of the curve moved down while yields in the medium segment finished the session higher. So far, the fixed income market has not recognized the koruna as a factor for price action; nevertheless we think that if the koruna firms further, the yield curve will steepen even more aggressively.

Hungary

Positive global equity market sentiment and easing fears from the currency devaluation in Latvia helped the Hungarian forint to continue its sharp recovery on Tuesday. The pair broke the EUR/HUF 280 level overnight after moving from 287 to 280 during the day and settled around 278 this morning.

It seems that the currency has been reacting fairly sharply to positive news. Central bank’s statistics show that foreign banks had been selling the currency from local banks steadily since early last year, but they started to buy back in March-April. A turnaround could set a new positive long-term trend for the forint.

The Hungarian bond market rallied with the currency and yields lowered about 20- 25bps across the curve. The curve has now become almost normal as the short-end rallied more, while the lack of interest at the long-end kept yields high there. The negative inflation outlook keeps us cautious about bonds, while the positive currency performance may drive yields further down.

Poland

Polish zloty strengthened further in line with improving regional sentiment. This was driven by relatively stable global equity markets, weaker US dollar and at least a temporary calm down around Latvia. As investors cheered at further Latvian budget cuts, the regional currencies started to strengthen from Monday onwards.

Yesterday the zloty broke through key 4.50 EUR/PLN and from a technical pointy of view, the room for further gains is opened. Nevertheless these are heavily dependent on the core market sentiment, notably on US dollar and equities, where sentiment may change after the consumer figures at the end of the week. Also the Latvian case does not seem to be completely resolved. Hence we continue to be only modestly bullish on the zloty in the near term.

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