Czech koruna outperforms the rest of Eastern Europe

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Currencies: Czech koruna outperforms the rest of Eastern Europe
Fixed Income: MNB stays on hold as expected

Czech Republic

The Czech koruna continued to firm against the euro, so it strongly outperformed the rest of the East European currencies. We think that the main reason for the CZK bullish run were forced stop losses of some banks and hedge funds, which tried to play regional carry trades with the koruna. This strategy has gone wrong these days. So, the EUR/CZK easily dropped below the 26.0 figures and unsuccessfully tested the key 25.85 support level.

The Czech yield curve was only little changed yesterday despite quite bullish signals form the domestic forex market and core bond markets. There are two possible explanations for the domestic bond market to stay cautious at the beginning of the week. First, the market has been waiting for Thursday’s CNB Bank Board meeting. Secondly, the long end of the curve might be pre-positioning ahead tomorrow’s auction of a 15Y benchmark. This might lead to underperformance of Czech bonds against their core markets counterparts.

Hungary

The Hungarian forint started the week in a bad mood and the weakening accelerated overnight after US equity and energy markets fell sharply. A strong Japanese yen and US dollar together with soaring equity volatility indices, like the VIX, sparked risk aversion worldwide and the forint was not exception from this.

The pair reached 282.50 this morning, which may act as a support level for the shortterm, but sour sentiment may continue to weigh on the currency.

The Hungarian bonds hardly changed on Monday as low volume allowed the market to ignore the changing global conditions. The 5y5y forward spread over the euro widened to 330bps, so the market seems to have been reacting mainly via spread adjustment rather than higher outright yield levels, but this situation may last only as long as core market yields decline at the long-term forward. The Hungarian central bank (as expected) left its benchmark interest rate unchanged at 9.50%.

Poland

The zloty got under pressure as the sentiment on the global equity market deteriorated. The massive correction on the equity markets and the escape from remaining carry positions in PLN/CZK pushed the EUR/PLN pair up as high as 4,547. A slightly higher increase in core inflation did not trigger any market reaction. Although both the core and the headline should head downwards in the upcoming months, current spike in core as well as the weak zloty put our expectation of an interest rate cut at risk.

For the rest of the week we are rather pessimistic for the zloty. It seems the correction on the risky assets may go on. A (potential) interest rate cut should not help either and the zloty may look for support only in the statement after the meeting. It is increasingly probable that the board may start to speak and even directly intervene in favour of the zloty as the pair moves further above 4.50 EUR/PLN.

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