Currencies in the region continued to be somewhat volatile this week
|FX and bond market stable in CEE
On global markets:
The most important macro release for the EURUSD next week will be the PMIs for the Eurozone as a whole and major member countries. Markets will be looking for indications of whether the economic slowdown in 1Q will be extended or a stabilization is becoming visible. From the US, no major macro indicators are scheduled. The minutes of the last FOMC should confirm that the interest rate setting body is firmly on course to hike interest rates further at the June meeting and beyond. The most-watched political event will be the forming of a new Italian government.
CEE currencies:
Currencies in the region continued to be somewhat volatile this week. As usual, the Hungarian forint and the Polish zloty fell the most, while the Croatian kuna could gain further on the seasonal pattern and the Romanian leu also held up rather well. As for the latter, the strongest gain was on Monday, courtesy of ongoing liquidity-absorbing operations from the central bank, while during the rest of the week the leu was more hesitant, which could also have been the effect of the somewhat poor 1Q18 GDP reading. Looking forward, fiscal woes and the aim of the NBR not to have a too detached rate level from its CEE peers could weigh on the currency. As for the zloty, local factors have not changed much, as the macroeconomic outlook remains positive while monetary policy should not change in the longer run. This should help the PLN going forward. As for the forint, the recent weakening is not, in our view, strong enough to trigger interventions from the CB. In fact, a slightly weaker HUF might help inflation to reach the target (the inflation target, at 3%, is higher for the MNB than its peers). The broad range of 310-320 for the EURHUF may remain, but the forint might hover in the upper section of this bandwidth in the upcoming weeks, or months. As for the Czech koruna, although the fundamentals would imply a stronger CZK, the currency may trade between 25.4-25.6 in the upcoming weeks, i.e. close to current levels. This is underpinned by the fact that the CNB openly communicates that it is fine with recent, somewhat weaker, levels in the koruna.
CEE rates and yields:
The Hungarian bond market clearly stands out as having fallen the most this week, while yield increases elsewhere in CEE remained more moderate. The spread of 10Y HBGs over German Bunds widened to almost 250 basis points, and the negative spread to 10Y POLGBs (i.e. below Polish yields) narrowed to between minus 30 and minus 40 basis points. Both levels are basically the same as last August-September, when the central bank first announced additional easing. As moves were much stronger for yields than for the forint, we think that the MNB will continue to emphasize next Tuesday its commitment to have loose monetary conditions affect the whole yield curve. HUF 60bn of FX liquidity-providing instruments will mature next week; the tender to roll these over will likely be held on the same day as the central bank meeting (as Monday will be a holiday in Hungary). The level of roll-over could indicate the MNB's willingness to stay dovish or not. Elsewhere, we do not see very large room for yields to fall from current levels in CEE, especially if the current strength of the US dollar and high US yields persist, while Hungary remains a question mark, as it strongly depends on central bank moves.
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