Currency markets continued their slide last week in CEE mostly

FX and bond market stable in CEE

On global markets:

Important releases are scheduled this week for the Eurozone as well as for the US, from which the EURUSD could take some leads. On Thursday, the flash estimate for Eurozone inflation for the month of May will be released. Markets will be looking for signs of any uptick in core inflation. On Friday, first the labor market report will be released and shortly after the ISM Index. Markets will take crucial information about the current strength of the US economy from these indicators.

CEE currencies:

Currency markets continued their slide last week in CEE mostly. Turkey seems to have remained a contagion factor for emerging markets in general, also taking its toll on CEE, although the Turkish situation is nowhere near the fundamental picture of any CEE country and the problems there are largely home-grown. An interesting situation appeared in the Czech Republic, as the koruna fell the most among CEE currencies until Friday afternoon. The CNB still seems to be okay with this, as Governor Rusnok last week indicated that, despite the recent weakening, the koruna is still within the “equilibrium band”. The weakening of the Croatian kuna could be considered a justified correction, as the recent strength was not fully underpinned by the seasonal boost in our view. The Polish zloty and the Hungarian forint also weakened slightly. We see the zloty as gaining in the upcoming weeks, especially if emerging market woes calm. The forint could also benefit from such a scenario, albeit the recent dovish messages from the central bank (continuing to stress the importance of easy monetary policy and increasing the discount offered at MIRS tenders) indicates in our view that the appreciation potential for the forint could be more limited than for the PLN. The RON may continue to benefit from the mopping up of additional liquidity from the central bank and the relatively high policy rate for some time, albeit fundamental (fiscal, current account) risks may weigh on the currency later on, especially if the NBR adheres to its earlier target not to keep the currency too strong as that could weigh on the already wide current account deficit further.

CEE rates and yields:

Yields finally showed a decline last week after the weeks of slides on government bond markets earlier in CEE. This was also made possible by some relief on international markets towards the second half of the week. The best performer was the Polish market, which was underpinned by relatively strong demand at bond auctions and the fact that supply should remain modest in the upcoming months, as more than 60% of funding needs were already financed so far this year. Hungarian yields also moderated towards the second half of the week. The MNB boosted appetite for HGBs by increasing the discount on the 5Y unconditional MIRS (0.37% vs. approx. 1.4% market IRS rate). The aggressive pricing of the MIRSs confirms our view that the MNB will deploy additional easing in order to keep risk premia compressed. We see 10Y HGB yields falling again below 3% and staying there in the second half of the year. As for the Czech Republic, although Governor Rusnok said that the CNB is not afraid of the recent koruna weakness, this could still speed up rate increases. A weaker koruna and tight labor markets increase risks of the next hike already taking place in 3Q18. For now, we keep our call unchanged for the next round of tightening to be in November this year.

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