EUR/CZK levels remain relatively high
|Yields mostly down, currencies little changed in CEE
On global markets:
The markets have reacted to last week's developments on the Brexit deal with some relaxation. The yield on 10Y German government bonds has risen somewhat and the euro has also gained some ground, although both starting from very low levels. The key for the markets next week will probably be how hard the EU will make it for the UK to get an agreement for a Brexit delay. We think that the EU will grant an extension without any (or only a few) conditions. Accordingly, we expect markets to become more confident, and German government yields and the euro cjould rise further.
This week, FOMC holds its meeting. While interest rates will be left unchanged, the most exciting will be the results of the new survey. Some members may reduce their interest rate expectations and therefore the median of expectations could drop, corresponding to one interest rate step for this year.
CEE currencies:
The FX market was rather stable throughout the week, with all CEE currencies marginally weakening against the euro except the Hungarian forint. The slight appreciation of the forint is likely related to markets waiting for the rate setting event. It will be held at the end of March and the Council might start the slow and gradual normalization of its monetary policy. On the other hand, EURCZK levels remain relatively high, in our view, even considering the upcoming dividend payments. A seasonal effect is expected to be positive in the coming months. Moreover, the risks of another rate hike in the Czech Republic are tilted toward May. This week, if the extension of Brexit is granted without any (or only a few) conditions, the markets should become more confident, supporting stability on the FX market. On the other hand, the FOMC meeting may bring a reduction of interest rate expectations by FOMC members, which is a potentially market-moving development. Otherwise, we expected limited volatility of other currencies, driven by local factors.
CEE rates and yields:
Higher February inflation readings compared to the market consensus moved yields up in the Czech Republic and Romania last week. In the Czech Republic, the bond curve has hardly changed, but the swap curve shifted up 5bp. While our baseline call for a next rate hike remains for August, we see some chance that the rate hike might be discussed already at May's meeting. In Romania, the bond yield curve steepened, as yields in the 3Y-10Y segment increased 10-25bp, while the short end was supported by high RON liquidity. Potential fixes in the design of the levy on banks could provide a strong boost to Romanian government bonds this week. S&P said last week that government measures could "contain imminent negative effects on monetary-policy effectiveness and help recover confidence".
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