CEE currencies remain vulnerable and more or less failed to gain on yesterday’s global equity markets optimism. The Zloty and the leu were slightly stronger, while the koruna and the forint lagged behind. We continue to be cautious in the short term. Although the regional sentiment may be more favorable ahead of Fed chairman’s speech (scheduled for Friday), global uncertainty driven now primarily by weak US and European figures might remain in place.
Interestingly, the regional government bonds are not following the sell off seen on equities and currencies hovering around multi-week or multi-month lows. The Polish 10-year yield is at levels last seen nearly a year ago (5.6%), in of Hungary there are close to one-month low, while Czech bond yields have recently approached all time lows. That is a positive signal. Although investors are certainly afraid of recession in Europe and US, they do not price in financial contagion in Central Europe – yields on long term maturities (as well as CDSs) remain significantly lower than in late 2008/2009.
Although long ends of yield curves are at appropriate levels in our view, as credit risk is lower and inflation fears have somewhat diminished recently, shorter maturities are probably overly pessimistic about the growth prospects. The Polish money market and FRA curve now prices in an interest rate cut in 6- 9 month horizon, which is not realistic in our view. Also in case of Hungary even if the economic situation deteriorates, it is hard to imagine interest rate cuts given still large amount of mortgages denominated in Swiss franc. Today’s NBH meeting should only confirm it.