Global turmoil weighs on CE currencies

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Currencies: Global turmoil weighs on CE currencies
Fixed Income: Hungarian 10-year yields soar higher and test 8% level

Czech Republic

The Czech koruna eases in line with other CE currencies as sentiment in emerging markets turned negative. Moreover, an outcome the central bank meeting appeared neutral to slightly dovish, so the koruna could hardly find support from the CNB (for more see the fixed income part). As a result the EUR/CZK pair tested the 26.30 resistance, but failed to break above this level.
Today, the koruna will primarily watch the outcome of the US payrolls. Since we believe that the risks might be on the upside of expectations, the koruna could recoup part of its yesterday losses.

The Czech yield curve steepened in a bullish fashion as a new CNB’s projection indicated that official rates could stay at the current low levels a bit longer than some markets participants had thought before yesterday’s meeting. Recall, that the CNB left the official rate unchanged, it new macro projection showed that the bank will not be aggressive in its ‘exit strategy’. The implicit trajectory for short term-rates actually declined for this year, while other estimates for the Czech economy were only little changed. SO, the outcome of this meeting could provide at least some relief for the Czech fixed-income markets, which should not fear an early rate hike as some hawkish comments from the central bank suggested at the beginning of the year

Hungary

The Hungarian forint dropped to a new record low for the year. Overnight trading saw it almost 2% weaker on the day at 274.70, from where the pair corrected back to slightly above 274.00. It seems that a global downturn has begun after the 10- months long recovery, which could last for several weeks if not months. Together with Hungary’s political risk the current weakening trend may last for longer, but of course some recovery could take place after the sharp losses yesterday.

The Hungarian fixed income lost ground yesterday and yields rose about 30-40bps in one-day at the long-end. The 10-year bid yield came close to 8.00%, which was a strong support level before, while the short-end of the curve remained anchored at below 6.00%, but they also rose slightly. The market could suffer more if the central bank stops the easing cycle at the current 6.00% level, but there is also the possibility that they continue with another 25bps cut at the end of the month, which would bear the risk of further forint weakness.

Poland

The Polish zloty weakened further on Thursday as the heavy sell off on the global equity markets prevented the pair from coming back below 4.00 EUR/PLN. Also the comments from the labor ministry did not help the zloty. Polish labor minister Jolanta Fedak expected a sharp rise in the unemployment rate towards 12.8% in January. That supports our view based on higher than usual seasonal layoffs in construction at the beginning of the year. Nevertheless it could have surprised some market players, especially those betting on a sharp acceleration of Polish domestic demand.

As the zloty has given up coming back below 4.00 EUR/PLN, the short term perspectives look increasingly pessimistic. The pair may stay in wait and see mode ahead of US payrolls, but we are pretty skeptical about further developments afterwards.

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