FX and bond market stable in CEE

On global markets:

From a fundamental point of view, the most important release for the EURUSD will be PMI indices for the Eurozone and major member countries. However, for markets, the political debate around Brexit and the risks of a hard Brexit will likely be in the foreground. The agreement between the UK and EU announced last week is only a stage in the divorce process and not more. It is far from over. The outcome remains completely open, especially as a majority in the British Parliament for the negotiated package is very doubtful from today's point of view. At the same time, however, this is only a snapshot. There is probably a month left before the vote. What will be decisive is how the public debate goes up to that point. Everything seems possible, from a majority vote to the resignation of Theresa May. The intensity of the reaction in the United Kingdom - various ministers and state secretaries have resigned and Theresa May's own party is working on a motion of censure - is an indication to us, however, that a hard Brexit has become more likely since last week. If a hard Brexit becomes foreseeable, we would lower our forecasts for yields on German government bonds at least for the first half of next year. Furthermore, the dollar would probably strengthen more against the euro than we currently expect.

CEE currencies:

Regional currencies fell somewhat last week vs. the euro, with the largest decline occurring at the Polish zloty. In particular, Polish lenders were hit after Financial Supervision Authority Chairman Chrzanowski resigned, following a Gazeta Wyborcza report claiming that he had made an attempt to offer help to Getin Noble Bank (which was at the time under a supervised recovery program) in exchange for a PLN 40mn bribe. Market turbulence intensified on Friday after NBP Governor Glapinski had to refuse allegations that he is planning to step down due to poor health. While the Polish zloty is likely to be hit by this scandal, the combined message of a high inflation forecast from the NBP with comments that the central bank may be looking for unconventional means of curbing inflation instead of hiking the policy rate could also have contributed. Although the PLN does not seem greatly mispriced, volatility could remain somewhat high in the coming time period. In the Czech Republic, the currency also remained rather weak, especially after the slight negative surprise in GDP numbers, which could reinforce views that the central bank might wait with a continuation of the hawkish policy. Fundamentals would still underpin a stronger currency in our view.

CEE rates and yields:

Yields mostly fell last week in the CEE region, apart from Poland, where the scandal around the financial authority and Getin have unnerved investors. In addition, however, the latest NBP inflation projection point to CPI rising to 3.2% on average next year, due to an increase in energy prices. We are much less sceptical about this, with core inflation just at 0.9% y/y at the moment. We are therefore also less certain about any unorthodox monetary policy measures, as in our view, the low inflation does not underpin any hasty monetary tightening, be it a rate increase, or a more unorthodox measure. Elsewhere, as mentioned, yields rather edged down than up, while for shortterm rates, Hungarian ones went slightly down, similarly to the Czech Republic, while Romanian rates went up only a tiny bit.

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