FX and rates markets reaction
The NBH decision found the market unprepared, including us, and at first blush the market seems to believe that the hiking cycle is truly over. In the blink of an eye, the entire IRS curve has moved down 15-40bp, resulting in a massive bull-steepening. The priced-in terminal rate has shrunk to 13.25% and we can expect re-pricing to continue in the days ahead. Long-term expectations for NBH rates have moved to 6-7%. We can probably go a bit lower, but combined with rising core rates, the move should be limited. So, normalisation of the inverted curve will now be a major topic, earlier than expected, joining the Czech National Bank and the National Bank of Poland. And looking at CEE peers there is a lot of room for steepening ahead.
In the bond market, Hungarian government bonds (HGBs) have finally returned to fair asset swap levels. However, the current global sell-off coupled with local uncertainty associated with EU money will make it hard to find buyers at these levels and combined with today's NBH decision, we can expect more of a sideways move with pending developments on these themes.
The forint has moved to its strongest level in a week, but we think the support from the NBH's surprisingly large move will be short-lived. On the other hand, in hindsight, the overall picture results in a further decline in the interest rate differential to early June levels. In the short term, the question is what effect the NBH's new liquidity measures unveiled earlier will have, from which the central bank has high hopes to improve monetary transmission and stabilise the forint. In the longer term, the topic of EU money remains on the table and will be with us until at least mid-November. Overall, we can thus expect more volatile weeks ahead around the 405 EUR/HUF level depending on incoming headlines. Moreover, we see HUF to remain in the grip of global energy price swings as well due to the country's vulnerability provided by its current account position.
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