Both the koruna and the Czech fixed income market ignored developments in Poland as the EUR/CZK continued to move sideways in a tight range and also the Czech yield curve was little changed. The only interesting development delivered the primary bond market as yesterday’s auction of the 10y government bond benchmark met only weak demand. It seems that yields were too low to be attractive.
Both the koruna and the Czech fixed-income market now eye tomorrow’s releases of GDP figures and CNB Minutes from the meeting held last Thursday.
On Wednesday, EUR/HUF hovered near the recent lows in the 263 big figure during the morning trade as sentiment on risk remained constructive early in Europe. The Hungarian inflation data ticked up to 4.7% Y/Y (headline) and 2.7% Y/Y (core). The outcome was slightly above expectations but had no big impact on the forint.
Later in the session, the correction on the commodity markets supported the dollar and hit most EM market currency. The forint was no exception to this rule. EUR/HUF spiked to the mid 265.50 area at the end of the European trading session.
Today, there are no important eco data on the calendar in Hungary. So, the forint trading will probably be driven by global factors, especially by the repositioning in commodities and its impact on the US dollar.
On Wednesday, the National Bank of Poland greatly surprised markets as well as us as it increased interest rates by 25 basis points to 4.25%.
The initial market reaction to the decision was aggressive, though logical. The EUR/PLN currency pair immediately strengthened to less than PLN 3.90 per EUR and FRA rates soared. Thus the spread between the FRA 1x4 rates and the three-month WIBOR is currently 25 basis points. This means that the market anticipates another rate hike as early as in June. Markets anticipate the end-of-year rates to be approximately 50 bps higher than at present.
We consider the above expectations to be overly aggressive. Our scenario only envisages a single rate hike by the end of the year, likely at the beginning of the next quarter. One reason is that we rely on the strengthening zloty to continue to tighten monetary conditions; another reason is that (year-on-year) inflation is currently peaking, according to our forecasts (April’s figure, to be released on Friday, should indicate a 4.5% price rise).