Headlines
Currencies: Forint leads the rally of CE currencies
Fixed Income: MNB Council cut by expected 50 bps, but discussed even 100 bps
Czech Republic
Yesterday, the Czech koruna strengthened slightly as it primarily tracked the forint. The koruna also benefited from weaker US dollar. As a result the EUR/CZK pair tested the 25.70 support level but failed to break below it.There is nothing on the domestic agenda today, hence the EUR/CZK pair will watch both the forint and the turns in the US earning season. Still, we expect the koruna will continue to underperform its regional peers because the central bank expected aggressively policy action threatens the market.
| Currences | change | |
| EUR/CZK | 25.74 | -0.4% |
| EUR/HUF | 264.3 | -0.9% |
| EUR/PLN | 4.164 | -1.1% |
| USD/PLN | 2.780 | -1.3% |
| EUR/USD | 1.497 | 0.4% |
| USD/JPY | 90.1 | -0.8% |
| Bonds 2Y | change | |
| Czech Rep. | 2.02 | -0.09 |
| Hungary 3Y | 7.08 | -0.03 |
| Poland | 4.99 | -0.02 |
| Slovakia | 1.70 | 0.05 |
| Eurozone | 1.40 | -0.03 |
| USA | 0.96 | -0.02 |
| Bonds 10Y | change | |
| Czech Rep. | 4.33 | -0.13 |
| Hungary | 7.56 | -0.01 |
| Poland | 6.09 | -0.05 |
| Slovakia | 4.47 | -0.01 |
| Eurozone | 3.29 | 0.00 |
| USA | 3.39 | -0.02 |
Hungary
The Hungarian forint started the week unchanged at the 267.00 level, but began appreciating shortly after the opening as equity markets turned more optimistic. The pair appreciated 1% to 264.00 in the afternoon. The central bank decided for another 50 bps rate cut to 7.00%, in line with expectations. The statement highlighted the positive inflation outlook, but was a bit more cautious on risk appetite and fiscal prudence. There was a tight majority behind the decision as some voted for a bigger move like 75bps and 100bps, suggesting that the general bias of the council has moved toward the dovish side.
We think the outlook has not changed much with the decision as it was expected and the global equity market sentiment could set the tone for the currency. Helped by increased global risk appetite, the forint strengthened in the afternoon to EUR/HUF 264, a whisker away from July and January 2009 lows, tough levels to break through.
The Hungarian fixed income market rallied alongside the currency in the afternoon, with especially the longer-end performing well. The 10-year yield for example fell a further 15 bps to 7.20%, while the FRA curve started to digest the probability of a sub-6% bottom of the base rate.
Interestingly, the forward swap curve has narrowed to a multi-year low as the market has acknowledged the reestablishment of nominal convergence. The 5y5y forward IRS spread over euro shrank to 180 bps, a level not seen since mid-2003, when the fiscal slippage ruined the euro hopes of Hungary.
Poland
The Polish zloty tracked the firming forint yesterday and gained by around 1% against the euro. However, it was not just the forint, which supported the positive price action. The zloty benefited from the weak dollar and very strong industrial production reading too. Recall that although the IP declined by 4.4 % year-on-year, it actually rose by 15 % month-on-month. This might signal that the economy is on the right track for recovery.Today, the domestic calendar is empty. So the zloty will focus on the forint, the dollar and more generally the US earnings season. Should the forint extend its rally the zloty might follow and EUR/PLN could decline closer to the 4.15 level.
