The central bank poured HUF liquidity in on Friday

On global markets:

The most important macro indicators will be released this week from the Eurozone. Purchasing Managers' Indices will give the first indication as to how the economy as a whole, and in large member countries, fared in July. From the US, the most important determinant for the EURUSD will be Fed Chairman Powell's speech on the challenges for monetary policy at the Jackson Hole Symposium at the end of the week.

CEE currencies:

Currencies in the region continued their relative divergent moves last week as local factors also played a role in addition to turbulent news surrounding tariffs in the US-China trade war. Now it was the Czech koruna that fared relatively well vs. the Polish zloty and the Hungarian forint: this has to do a lot with rate moves, as rates fell the least in the Czech Republic while they continued their large decline in Hungary and in Poland. As for the zloty, it jumped on a roller-coaster ride last week, but on Friday, after hefty weakening earlier in the week, the currency got a boost amid (this time) positive sentiment on global markets. As we do not think there will be a rate change at least until the end of next year, while the market is now starting to believe in such a scenario, we see the zloty firming in the upcoming weeks. The forint may remain volatile or even weaken further, in our view, as the central bank poured HUF liquidity in on Friday by increasing the total stock of FX-swaps by HUF 150bn to HUF 2,003bn, a record high. Even if we know from the MNB that it is the liquidity surplus that we should be watching, this seems a large increase to make any appreciation of the HUF on the short run rather counterintuitive. Investors also have to bear in mind that there are bank holidays in Hungary on August 19-20, likely rendering the FX market rather illiquid, where it is easier to move prices. Other currencies remained relatively stable, with the Romanian leu showing slight weakening vs the euro.

CEE rates and yields:

Following the continued decline in German Bund yields, CEE bonds continued to rally, with Hungarian and Polish spreads narrowing further over German Bunds. Czech bond yields showed only a small decline, however, as did interest rate swaps: the latter only fell 10-15bp over the curve, which looks mild vs. the decreases on the zloty and forint swaps curves (15-25bp). This may have something to do with Czech central bank governor Rusnok's words that he thinks there is a very low chance of monetary easing in the upcoming quarters, and that the policy rate may be kept at 2%. Against the backdrop of a strong ongoing decrease of global rate expectations, this comment could sound somewhat hawkish. In Hungary, before the four-day holiday, the central bank poured in a substantial amount of additional liquidity with FX swaps, which is likely to cut short-term rates this week. As for our longerdated yield forecasts, we have cut them in both the Czech Republic and Hungary, indicating only a mild increase in the upcoming months. While current moves on global government bond markets seem very aggressive and could cause some rebound in yields soon, a more lasting increase in yields could only come if reassuring comments appeared on global markets (i.e. a significant improvement in US-China or some follow-up on rumors about a possible German fiscal easing). In addition, it also could not be ruled out that the speculation on stronger ECB easing intensifies further. We also see some downward risks to our Polish yield forecasts.

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