Regional FX & Fixed Income Strategy
Czech FX: Despite growing media speculation to the contrary, the Czech National Bank opted not to launch FX interventions following the Czech National Bank's September 26 board meeting, in line with our expectations. With a recovery in economic activity starting to take hold across Central Europe, we maintain that direct FX interventions by the central bank remain unlikely unless the koruna starts to strengthen towards the CZK24.00/EUR level.
Ukraine CDS: The risk of an all out trade-war with Russia in retaliation for signing the EU's association agreement in November risks pushing Ukraine's already vulnerable economy towards economic collapse. Ukraine's 5 year CDS spread opened 45 basis points higher than last week, at 1104bps, and a combination of a large current account deficit, low FX reserves, unrestrained government spending, extortionate borrowing costs and difficulty in accessing external financing all point towards a high risk of currency devaluation and/or default over the coming months.
Romania FX: With a higher proportion of Romanian local debt now under foreign ownership (27.8% in June), we believe investor appetite for the country's local debt will determine the future trajectory of the RON over the next few months. We now see potential for the leu to continue weakening over the coming months, as we expect the National Bank of Romania (NBR) to continue its interest rate cutting cycle, pushing down yields on local debt and modestly reducing demand for the currency.
|Political Risk Driving Spread Higher|
|Spread Between Italy and Spain 5-Year Credit Default Swap (CDS), basis points|