On global markets:
The downward revision of GDP forecasts by the European Commission has also left its mark on the bond market. Now that the expected lower growth is close to potential, investors fear that this will have a dampening effect on inflation in the medium term. ECB President Draghi stressed at the monetary policy meeting in January that a weaker growth dynamic close to or below potential growth could mean that it takes longer for inflation to approach the ECB target. Since both the US Fed and ECB have made it unusually clear that they will wait and closely monitor the data situation before taking any further decisions, the financial markets are sensitive to revisions of economic forecasts.
Most currencies weakened last week in CEE – a notable exception was the Romanian leu, as it enjoyed some relief, given that the government seems to be backpedaling from its extremely controversial measures to some extent, including the intention to cut the so-called "greed tax". However, the NBR was also likely present on the market, as the governor said that it cannot deny news either that they were on the market, or the news that they did intervene on behalf of the MinFin. The HUF likely also weakened as markets gave up somewhat on high hopes that the MNB will start tightening soon, while the decline of the PLN might have to do with Governor Glapinski's comments that the NBP might not hike for the next two years (or even until 2022). On the other hand, the CNB in Croatia needed to intervene on the HRK market, buying a total of EUR 450mn at an average rate of 7.41686. Kuna buying interest, however, can likely be explained by the recent government bond swap operation, where EUR 500mn of the total EUR 1.5bn maturity was replaced with a combination of a 10Y pure kuna issue and a 3Y FX-linked issue. In the meantime, the US dollar also firmed against the euro, which could have had a negative impact on CEE currencies as well. Current exchange rate levels in CEE are not very far off from our forecasts. Appreciation from current levels does not seem to likely at either of them, while for the CZK, where we have appreciation penciled in, we are expecting the koruna to appreciate to a lesser extent than the central bank envisages.
CEE rates and yields:
Yields fell marginally in the region (1-3bp w/w), apart from the Czech Republic. Yields are being kept at bay also by a strong decline in Bund yields, courtesy of the new forecasts of the European Commission. Yield declines in Romania and the very strong buying interest for short-term government papers at the auction last week, with around RON 1.3bn demand for RON 300mn worth of papers (as a result, the issued amount was doubled) indicates the relief of market participants. However, for markets to calm down on the longer run, policymakers would need to come forth with more exact plans on how they want to amend the controversial measures in Romania. Current yield levels indicate some downward risks to our yield forecasts in some CEE countries.
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