Currencies did not show any spectacular moves last week in CEE

On global markets:

This week, important economic data for both the US and Eurozone are scheduled, which should give EURUSD direction. On Wednesday, the purchasing manager indices for the Eurozone and major countries will be released. Markets will be looking especially at whether the manufacturing indices have stabilized after a long decline. For the US, retail sales will be released the same day, showing how all important consumer spending is evolving.

CEE currencies:

Currencies did not show any spectacular moves last week in CEE. The zloty stood out slightly from the pack with a mild appreciation. For the short term, we do not see domestic factors as supporting the PLN – rate stability is expected, despite increased inflation and fiscal easing. The US dollar fell last week, however, which is usually beneficial for the zloty. We see sustainable zloty appreciation only in the longer run as more likely. The Romanian leu and Hungarian forint fell last week against the euro, however. Inflation is running highest in these two countries in the region, partially underpinning this weakening, as central banks are hesitant to tighten in a more pronounced way, given that the external environment is cooling off. As for the leu, the NBR's tight liquidity management could prevent abrupt depreciation in the short run. However, for the longer run, the sizable current account shortfall could put pressure on the leu. As for the forint, the current account position is better, but Hungarian central bankers are pursuing a much more dovish policy than their Romanian counterparts. Still, we see that the currency could remain relatively stable in the coming weeks (in the absence of major external market moves), as there are not many important releases until the next monetary meeting to be held on April 30.

CEE rates and yields:

Yields went up last week on the German Bund market, but not all countries in CEE followed these developments. As we have discussed earlier, Czech yield spreads seem a bit too high vs. German Bunds; the recent narrowing of the 10Y spread thus matches our view. Croatian and Polish spreads also decreased further. On the other hand, Hungarian 10Y yields went up further, and to a much larger extent than Bunds. Swap curves also show a notable increase across all tenors above 1-2 years in Hungary w/w, while this has been more muted in other countries (i.e. Romania, which is also facing high inflation), or there was no change at all (i.e. in Poland), on a weekly basis. The Hungarian central bank can still maintain loose conditions at short maturities, but developments on longer tenors could indicate that markets are starting to bet on higher inflation. The developments are somewhat odd nevertheless, as last Monday's higher than expected reduction in extra liquidity (provided through FX swaps) would need to work in the other direction. It will be very interesting to see the FX swap tender this Monday, as the 3M Bubor has so far failed to increase to the extent (+10bp) the MNB was communicating after its rate setting meeting.

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