Export outlook worsens for CEE – yields down, FX mixed

On global markets:

Alongside the ongoing debate on the shape of any future Brexit, important US macro indicators will be released next week, which should have an impact on the EURUSD. With (delayed) figures for retail sales, the ISM Index and the labor market report, a series of macro heavyweights are scheduled, which should give markets a pretty clear picture of the economy's status.

CEE currencies:

The Hungarian forint took a beating last week amid perceived central bank dovishness, as markets likely had expected a much sharper turn in monetary policy, which did not come. With this move, the Hungarian forint lost nearly all of this year's gains and became the worst-performing currency in CEE in March. This did not take us by surprise at all, however. External price pressures are definitely going down, and while there are upside domestic factors for inflation, the latter is nothing new. The Hungarian central bank is walking a fine line, but has at least acknowledged the uncertainty via Vice Governor Nagy's comments that their decisions will be ‘data-driven'. In this setup, we see the EURHUF as volatile and definitely not returning to levels around 315. Elsewhere, currency movements were much more stable. For the Czech koruna, the relatively dovish comments after the rate setting meeting could dampen aspirations for appreciation. The zloty could remain more or less stable, as we do not expect surprises from monetary policy. The Croatian kuna was falling a bit lately, likely due to dividend payout effects, but the approach of the holiday season could soon reverse the trend in the HRK. The Serbian dinar was also under appreciation pressure, which the NBS tamed with interventions every day last week. We expect the dinar to remain subject to appreciation pressure.

CEE rates and yields:

Central banks in CEE are facing a dilemma on what to do, as global rate expectations are falling, while domestic factors point toward rising price pressures. The dilemma became obvious after last week's rate decisions and central banker comments. MNB Governor Matolcsy's words on Tuesday about ‘no tightening cycle' had to be further commented on by Vice Governor Nagy. Czech rate-setters also debated somewhat (according to Governor Rusnok) in that they ‘could raise a little now, but then have to cut later'. Polish rate-setters also openly started talking about possible inflationary pressure from the recently announced fiscal easing package. We doubt that this could lead to rate increases, as inflation is still under 2%, well below CEE peers. But such comments could have fueled some slight increases in yields and on the swap curve in Poland, while elsewhere, mild decreases in rates and yields could be observable. Quite characteristic of the last two weeks, Polish 10Y yields failed to follow Hungarian yields in spread narrowing vs. Bunds, while the two countries have a similar risk profile. Also interesting is the continuous widening of the yield spread between 10Y CZK and Bund yields. While in 2017, the Czech yield was below that of its German counterpart, the current spread is about 200bp, which was only (and just slightly) higher at the time of the 2011-12 euro crisis and the 2009 financial crisis. Fundamentals, in our view, do not justify such a wide spread.

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