EU says to help Latvia at any costs

Headlines

Currencies: EU says to help Latvia at any costs
Fixed Income: Hungarian inflation surprised on the upside

Hungary

The market had a quiet day yesterday and the Hungarian forint seems to have topped at 278/€ in the morning followed by gradual weakening to 280/€. Today’s inflation data disappointed at 3.8% Y/Y against expectations around 3.0% Y/Y, while core CPI nudged down to 3.1% Y/Y from 3.2% Y/Y. The shock occurred mainly at food prices as potato and other vegetable prices spiked. The more important durable goods and service inflation remained broadly unchanged.

Central bank’s May inflation report was built around the assumption of a declining underlying inflation trend to 2%. The current release is in sharp contrast with that assumption, but the central bank could be right that external price shocks will not feed into other categories because the recession’s shrinking domestic demand together with stable nominal wage level may keep price pressures contained.

Hungarian bond yields declined another day by some 10bps and yields approached the key 10% level again. The agency bought back only a tiny amount on this week’s buyback auction pointing to easing selling pressure on the market. The inflation outlook is highly uncertain, thus we would be cautious with recommendations. The future could largely depend on the underlying inflation trend and how incoming price shocks could affect it.

Czech Republic

The Czech koruna was only little changed yesterday. The EUR/CZK pair moved sideways as the market relatively easily digested a hawkish comment from CNB’s Board member Zamrazilova. The EU support for Latvia’s lat might be good news for CEE currencies including the koruna. Moreover, today’s final figures for the April industrial production were a bit better than the preliminary figure (though there was still month-on-month decline), so the EUR/CZK might have another reason to test the 26.53 support level.

The Czech yield curve steepened in a bullish fashion as the stable koruna on the stronger levels helped the front end of the curve despite quite hawkish comments coming form the central bank. Recall that CNB’s Board member Zamrazilova confirmed its hawkish stance from the last CNB meeting and repeated that rate stability is the best option. Interestingly, Zamrazilova argued that the CNB should not cut rates further since it could harm solid deposit growth, which is a very positive factor in this crisis. Although we do not think that such stance is common inside the Board, one should take it into account for the repo rate outlook, which seems toe be less certain now.

Today, the domestic calendar is virtually empty (the final IP data is not a market mover), so the domestic fixed income market will fully focus on core bond markets, which will be quite busy today.

Poland

The Polish zloty remained nearly unchanged on Thursday. After initial gains, the pair scaled back on a weak US Treasury auction and the subsequent rise in global yields. Nevertheless the zloty managed to stay below crucial 4.50 EUR/PLN.

Today the session started a bit more optimistic thanks to the developments in Latvia. Late yesterday, the Latvian Prime minister said he expects to access the next tranche of its rescue package soon and the currency does not need a devaluation. His words were backed by the EU commissioner Almunia who thinks it would be disaster for Latvia to devaluate its currency and said he wants to help with the defence of the currency at any costs. These strong comments could be supportive for the whole region. Nevertheless finally the unpredictable sentiment on global equity markets should play a major role especially in the afternoon with the US retail sales scheduled for release.

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