BMI’s Europe Currency And Fixed Income Strategy
Czech Republic: The stronger-than-usual dovish bias of the Czech monetary authorities’ board meeting held on August 1 slightly weakened the Czech koruna against the euro, with the koruna breaking a key support level at CZK26.00/EUR. After mentioning the possibility of foreign reserve intervention, the Czech National Bank (CNB) board voted formally for the first time on such action. In our view, the koruna is likely poised for mild depreciation over the next few weeks, as investors adjust their exchange rate expectations.
Hungary: We see scope for the Hungarian forint to show further weakness in the weeks ahead, with investor concerns over the pace of cuts to the policy rate likely to be the primary driver. The forint broke through medium-term support at HUF300.00/EUR on August 1, before paring back some losses to HUF298.33/EUR at the time of writing. If unexpected or larger-than-expected rate cuts push the currency through long-term support at HUF305.00/EUR in the coming weeks, we would take this as a bearish signal for the forint.
Italy: We believe Italy’s sovereign credit default swap (CDS) spread will move outside Spain’s over the next few months, and we thus placed a Spain-over-Italy 5-Year CDS view in our asset class strategy table on July 31. We believe the two countries are on diverging fiscal and political paths, with Italy facing a potential collapse of the governing coalition, while Spain is being rewarded for its fiscal consolidation efforts. Since initiating the view, the CDS spread has moved from parity to 8bps in Spain’s favour.
Romania: In July, the National Bank of Romania (NBR) cut the policy interest from 5.25% to 5.00%, in line with our expectation of 25bps of cuts in H2 2013. We have now revised our year-end policy interest rate projection from 5.00% to 4.50% in 2013, and from 4.50% to 4.25% in 2014, on the back of comments made by Mugur Iscarescu, the NBR Governor. Iscarescu suggested that further rate cuts would be based upon “calculations over inflation, which we are convinced will be significantly lower over the next few months”. This implies that a more dovish monetary policy stance will be adopted over the next few months, despite elevated inflationary pressures at present.
Turkey: With domestic protests fading from the headlines and expectations of US Federal Reserve quantitative easing tapering being pared back by below-consensus non-farm payroll readings, Turkish domestic debt appears poised to extend its short-term rally after yields in July surged to their highest level since May 2012. However, with consumer price inflation reaching 8.9% year-on-year in July, from 8.3% in June, we see several factors that will prevent significant yield compression. Rising inflation will cause domestic players to demand higher compensation, especially for longer-dated government bonds, while the prospect of further central bank tightening will increase short-term rate expectations. Furthermore, rising inflation supports our expectation that depreciatory pressure on the currency will persist, and lira volatility will remain elevated due to the extreme sensitivity of Turkish assets to the trajectory of developed state monetary policy. These factors will make foreign ownership of domestic debt more risky, increasing potential FX losses and capping yield compression in the coming weeks.
Our full financial market views on Europe, and other regions of the world, are available to subscribers at Business Monitor Online.