FX and bond market hold stable in CEE
|On global markets:
This week’s most important indicators will be the PMIs for the Eurozone and large member countries. Sentiment among survey participants cooled during the first quarter. During the month of April, geopolitical tensions increased again, as the US put sanctions on Russian companies and individuals and the crisis over Syria heated up, which might have weighed additionally on economic sentiment. Also this week, the ECB Council will convene on Thursday. We do not expect any meaningful change in the communication, only the date when the Council will decide on the asset purchases beyond September should become clear.
CEE currencies:
Currencies did not move much the last week, apart slightly from Hungary, where the EURHUF rate got close to breaching the 310 level. With this move, the EURHUF is increasingly moving away from our end-June target, which is at 315, suggesting some weakening for the forint going forward. Elsewhere, currencies are around our end-1H forecast or are slightly weaker than those levels, and therefore, unless there is a more notable change in global sentiment (i.e. increased fears of stronger than anticipated tightening from major central banks), then CEE currencies should stay relatively strong, in our view.
CEE rates and yields
Yields on major markets went up last week, amid some increase in inflation expectations, against the backdrop of recent gains in oil and commodity prices. However, although the German Bund gained almost 10bp between Wednesday and Friday, CEE bond yields either failed to increase to this extent, or even declined further (the latter was true for Croatia and the Czech Republic). Slovakia also enjoyed a decline in spreads vs. German Bunds, amid very strong demand at bond auctions, where the country sold nearly EUR 90mn in very long-dated bonds maturing in 2047, while it sold more than EUR 100mn in 2031 bonds. Yields came in at 1.79% and 1.25%, respectively. This increased the coverage of this year’s issuance plan substantially, which stood at around 12% at the end of the first quarter. ECB bond buying and fiscal resilience should continue to give support to Slovak bonds. As for Serbia, recent news indicates that the government may wish to buy back USD 700mn in outsanding debt; details on the funding of this plan remains undisclosed at the moment. The central bank has been fighting with inflows for quite some time, which increases its FX reserves; only last week it intervened by selling dinars in the emount of EUR 40mn. This week could be important for bond markets too, as fiscal notifications for 2017 will be released, uncovering actual shortfall (or in many cases surplus) figures. Romania might not just be watched because of this, but also due to how much the NBR will be rolling over of its liquidity-absorbing deposit facility, which was implemented last Monday in the amount of almost RON 19bn in a 7-day tenor. The shortest duration interbank deposit rates jumped on the news, but moderated somewhat thereafter. The central bank’s intention is to bring these closer to the policy rate, which currently stands at 2.25%. We view this as a precursor rather than a replacement of further benchmark rate hikes. We marginally favor a hike scenario at the May meeting in Romania.
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