Central European and Eurasian Local Rates Outlook: Opportunities and Challenges
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Czech Republic - local rates views summary
The CZK still has a lot to offer - high carry, balanced market positioning and a central bank ready to intervene in the FX market if the koruna weakens. In addition, the CZK has by far the highest beta against EUR/USD in the region, making it a good proxy for a global story view with a high CEE carry element. We believe the market has gone too far with the pricing of the CNB rate cuts this year and along with the heavy received market positioning we see an opportunity for an upward re-pricing of the IRS curve. CZGBs offer good value with the prospect of a near halving of supply next year.
Hungary - local rates views summary
We expect that the market will continue to favour the HUF, which will continue to maintain a significantly higher carry within the region in the second half of the year. In our view, the playing field for the forint will be in the range of EUR/HUF 368-378 and we target year-end at 372. The market is pricing in a large portion of NBH normalisation, but we believe that the fast disinflation and a strong forint will support further market bets on policy easing. We see a lower and steeper curve. HGBs are getting expensive after the recent rally.
Poland - local rates views summary
The Polish zloty has closed the gap with the CEE region and although it should remain on a strengthening trajectory it is no longer undervalued in our view. We target 4.45 EUR/PLN for the end of the year. However, currently, the significant long positioning of the market and election noise over the coming months will be hurdles. The NBP is the most dovish central bank in the CEE region and with inflation falling, the market will price in more rate cuts both this year and next. Moreover, inflation has the potential to surprise to the downside. POLGBs are seen as the cheapest bonds in CEE, while funding is fully under control, pricing too many negatives.
Romania - local rates views summary
The new range is likely to be 4.94-4.98 EUR/RON, with no expectation of moves to the lower levels. We envisage at least one more upward shift before the year-end. We target the EUR/RON level of 5.02 for the end of the year. ROMGBs offer the best funding situation and disinflation profile in the CEE region. In addition, they are the only ones to offer a steep curve and reward for duration. However, spreads against CEE peers and heavy long positioning may indicate a problem for the next rally. The overall direction remains clear, further gains may be at a slower pace.
Ukraine - local rates views summary
FX reserves exceeded nearly US$36bn in May, for the first time since 2011. This reflected continued foreign aid and lower monthly costs of FX interventions. This significantly deceases near-term odds of another devaluation of the UAH, as the central bank may prefer a stable currency to combat inflation. The fundamentals behind UAH remain unsupportive though. Ukraine has benefited from declines in global commodity prices and the CPI is dampened by the high statistical base. However, we expect the NBU to wait for a more decisive period of disinflation and start rate cuts in early 2024. Public and external financing needs have been met by foreign flow. The fiscal position is set to deteriorate further but improve gradually in the medium term.
Kazakhstan - local rates views summary
KZT appreciation since 3Q22 was based on the substantial atypical net private capital inflow, which could prove volatile. USD/KZT has now almost recovered to levels seen before February 2022, and the new fiscal rule assumes lower state sales of FX out of NFRK. In addition, risk of Russia-related secondary sanctions may push Kazakhstan be more cautious about trade flows
Turkey - local rates views summary
Under the CBT policy with indirect FX interventions and regulations to control locals' FX demand, gross FX reserves have been under pressure since the beginning of this year. Given this backdrop, there is a consensus that points to a normalisation in the conduct of the monetary policy. We target 26.0 USD/TRY for the end of the year. The CBT has maintained its purchases from the secondary market, still below 6% vs the limit set at 7% of total assets of the CBT weekly statement. In the aftermath of elections, signals implying a change in policy direction are likely to determine the bond market outlook. Markets are pricing in more orthodoxy in the policy ahead than anticipated earlier.
