Markets feel more and more the negative spill-over effects coming from the euro zone debt crisis as the koruna extended its losses and the asset-swap spreads widened further.
Concerning the Czech bond market, the above mentioned spread might be pushed even further as some pre-positioning ahead of the upcoming bond auction (on Wednesday) could move yields further north.
The Hungarian forint weakened to a 4-month low of 271.50 EUR/HUF on Friday and to 272.00 this morning as the euro zone debt crisis continues to weigh on risk sentiment. The record strong Swiss franc rate is also adding to the fears as Hungary has a large foreign currency debt linked to the CHF rate. Hungary has roughly 20% of GDP of Swiss franc debt, which will mean an additional burden to the recovery of domestic demand.
Banks had already been struggling with non-performing household loans around 10% and this may worsen if less debtors will be able to pay the monthly installment. This means that Hungary could continue to underperform the peers on the FX front as long as the Swiss franc is under appreciation pressure.
On the bond market, the long-end has been following the currency only moderately due to good inflation data, which we saw last week. Yields at the 10-year maturity have been narrowing the key 7.50% level, while the short-end remained broadly unchanged at 6.00%. If the currency weakens substantially further, like below the 280 EUR/HUF level, the central bank may decided on a rate hike to help it, but stable rates are on the cards for now.
The Polish zloty failed to get back below 4.00 EUR/PLN by the end of the week. The ongoing tensions in the euro zone periphery continue to weigh on Polish assets and that should be the case for the week ahead as well.
The zloty did not have the chance to take profit from better than expected current account balance. The balance came out of deficit for the first time from February 2010 mainly thanks to huge inflow of EU funds. The current transfers balance, through which the Brussels money flows, was in surplus of 1.66 billion, compared to 618 million the previous month. Also the commitment by Polish PM that the budget deficit should be under 3% GDP in 2012 did not bring any relief. We are somewhat skeptical regarding today’s figures as employment growth should continue to be slow and play in favor of current neutral stance of MPC board.