Spike in ViX triggers regional sell-off

Headlines

Currencies: Spike in ViX triggers regional sell-off
Fixed Income: Czech bond market is awaiting a 10Y bond auction

Czech Republic

The Czech koruna continued to ease as sentiment in emerging markets deteriorated in line with the global equity sell-off yesterday. Hence, the EUR/CZK pair bounced to the 25.70 level.

Interestingly, the market has not paid much attention to the Constitutional Court ruling yesterday that early parliamentary elections - currently scheduled for Oct. 9-10 - may not take place until the Court has decided on the constitutionality of the elections. According some opinion the decision of the Constitutional Court might mean that the interim government of Jan Fisher will govern until next June, when regular elections were originally supposed to be held. In our opinion, this could be an extreme scenario, nevertheless the Court has clearly created political uncertainty and this might lead to some underperformance of the CZK against its regional peers in near term future.

The Czech yield curve steepened slightly on Tuesday, the long end of the curve gained over 3 bps and 1 bps lost at the front end. August budget deficit was higher than had been expected but its impact was negligible. Nevertheless, trading was volatile with low volumes again and higher yields at the long end may correspond to today’s auction prepositioning.

The main issue today on Czech bond market is an auction of a 5.0%/2019 bond. The ministry of finance plans to issue CZK 5bn. We expect that the whole amount will be sold. However, it is possible that the amount could be increased and this may send Czech bond yields up latter.

Hungary

The correction of the Hungarian forint accelerated overnight after the key limit of 275.00 lent some support during the day. The pair’s recovery was thus short-lived and the big loss of US equity markets triggered a major selloff in the currency and the EUR/HUF pair dropped to as low as 278.00.

An interview with the Finance Minister revealed that the government plans to delay some of the next IMF loan tranches later into next year because the market based financing is recovering. This could potentially help the currency to whether the storm around next year’s election. The Minister also admitted that some spending reserves will have to be used in order to keep the budget on track for the 3.9% of GDP deficit target this year. This is reassuring news, but may not matter much in the given conditions as global themes tend to override domestic news.

The Hungarian fixed income market continued their 1-week old weakening trend on Tuesday and yields rose another 10-15 bps across the curve. Yields levels below 8.00% have disappeared over the 2-years maturity, while rate cut expectations have kept the short-end lower, although the FRA market is also taking back some of the expected easing. The 3x6 FRA has left in additional 100bp rate reduction, while the 9x12 kept 125bp, some 50bp less than a week before.

Poland

Rising risk aversion sent the zloty sharply lower at the beginning of the month. Tumbling nearly 2% the pair finished as far as 4.17 EUR/PLN. There were no domestic events that could justify this move. Hence it is quite obvious the sentiment deteriorated due to the more than 2% sell off on the global equity markets and nearly 12% spike in ViX. The political uncertainty in the Czech Republic may have helped the CEE bears as well, but were not the primary driver of the sentiment.

The situation could calm down a bit today. Nevertheless the zloty eyes the ongoing battle between bears and bulls on the global markets. We remain optimistic on the Polish currency but the short-term volatility can be quite elevated. We also continue to watch important technical resistance at 4.21 EUR/PLN.

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