Headlines

Currencies: Dubai triggers sell-off in CEE forex markets
Fixed Income: Czech short rates ignore koruna’s weakening


Czech Republic

The Czech koruna eased significantly as threat of Dubai’s default hit all CEE currencies. The EUR/CZK pair easily broke above the 26.300 level and even tested the 26.500 psychological resistance level this morning. Until now, this resistance survived, but should the global market sentiment deteriorate further, it could be successfully tested. In such a case the next strong resistance should be expected at the EUR/CZK 26.62 level, which is a six-month high for the pair.

The Czech bond yield curve shrugged off the weak koruna and surprisingly steepened as the front end of the curve shed by around 3 bps. On the other had, the Czech swap curve flattens, which resulted in wider asset-swap spreads. A further widening of these spreads could be expected, if global sentiment on risky asset markets deteriorates further.

Currencieschange
EUR/CZK26,471,5%
EUR/HUF274,92,3%
EUR/PLN4,1881,9%
USD/PLN2,8184,0%
EUR/USD1,484-1,6%
USD/JPY86,4-0,5%

Bonds 2Ychange
Czech Rep.2,070,04
Hungary 3Y7,100,06
Poland5,130,01
Slovakia2,51-0,09
Eurozone1,22-0,12
USA0,62-0,12

Bonds 10Ychange
Czech Rep.4,18-0,03
Hungary7,640,07
Poland6,210,07
Slovakia4,14-0,07
Eurozone3,13-0,10
USA3,17-0,09


Hungary

The Hungarian forint weakened sharply on Thursday as global markets were hit by news about Dubai and concerns about the sustainability of the global recovery. The pair dropped 3% from 269.00 to 275.00 by early this morning, which could be a key support level for the short-term. All depends on the length of the global correction, if that persists, we may see further weakening of the forint over the coming weeks. Market positioning is relatively light, but given Hungary’s vulnerabilities stemming from indebtedness, the forint could be a high beta currency in the emerging market asset class world.

The Hungarian fixed income market lost about 30bps at the longer-end and about 10bps at the short-end. Rate cut expectations are still alive and albeit they softened a bit with the weaker currency, they are anchoring the short-end close to the 6.00% level. The long-end therefore is more vulnerable to the current negative sentiment and widening 5y5y forward spread to the key 250bps level suggests that the convergence anchor is not that strong at the moment. This could allow for more losses, while the sharp move yesterday may be followed by a period of consolidation.


Poland

As other currencies in the region, also the Polish zloty is under pressure due to fears for a default by Dubai. The pair got as high as 4.16 EUR/PLN without any significant impetus from the domestic scene. One of the key voters on the MPC board Jan Czekaj told in an interview that he expects GDP growth to accelerate and a stronger zloty in the months ahead. Nevertheless it did not help the zloty to strengthen. We bet on a continuing of sell-off today. The pair may test 4.21 EUR/PLN and in case of break-through space for further short-term losses opens.