Trades of the week
In FX space we are once again looking at RUB following the recent rebound against USD. Positioning has been recently cleared with long positions coming down to an 11-month low, while the upcoming round of tax payments (RUB50bn-RUB75bn in profits tax due on Mon, RUB150bn in excise and MPT taxes on Wed) ought to provide support.
A move below the 50DMA could trigger some technical selling. We have also initiated a short EUR/HUF position ahead of Tuesday’s banking sector announcements as we expect all involved to find a workable solution. We keep an eye on EUR/HRK where corporate demand and roll off of FX-linked t-bills are keeping EUR/HRK at elevated levels – once this is over we expect a rebound on traditional tourist flows. In the Eurobond space, we reiterate our long Belarus 2015 position – the first rally has come home to roost (following the announcement of the USD3bn EurAsEc package from Moscow).
Event & data watch: Hungary & Turkey
The start of this week in CEE will be dominated by Hungary’s announcement, most likely on Tuesday, on planned FX loan conversion. As we discuss in a focus article this week, we expect the government and banks to present a workable solution that does not translate into any immediate depreciation pressure on HUF.
Thereafter focus is likely to shift to Turkey, when the CBT decides on policy on Thursday. We do not expect any change in policy but watch for any post meeting updates on the CBT’s view on its progress with its unorthodox policy. In the lead up to the meeting on Tuesday industrial capacity utilisation and industrial confidence data are released. Capacity utilisation has been range bound between 72.5% and 76% since April last year, posting at 75.1% last month, below its pre-crisis peak of in excess of 80%. Industrial confidence is much closer to its pre-crisis peak, though should it follow recent PMI data, it should decline from here.
In Poland we watch for retail sales and unemployment data on Wednesday. At first glance last week’s IP data was weak but on a seasonally and working day adjusted basis industrial production gained 1.3% on the month (16.6% annualised). Retail sales has not rebounded as rapidly as industrial production but is firmly positive (9.4% YoY in April). At 13.1% in March unemployment has not shown a turnaround but this is a reflection of a growing labour market – employment rose 3.9% in April. Key for the MPC over the next couple of quarters will be whether or not the opening up of labour markets in Germany and Austria will see the Polish labour market once again decline, translating into wage pressure. At the EBRD meetings this weekend in Kazakhstan, Governor Belka indicated that this month’s rate hike represented an acceleration rather than enlargement of the hiking cycle.
In CIS space, the data calendar is light but we watch for any newflow from Belarus. Last week PM Putin indicated that Belarus would receive USD3.0-3.5bn from EurAsEc but will require more both from the IMF and from privatisation flows to cover its financing gap. Amongst Russia, Kazakhstan and Ukraine, Russia is the only country where we see scope for near term currency gains, though some recent macro indicators remain disappointing. For example last week’s data on real disposable income showed a 6.5% YoY decline in April, pointing to a further decline in consumption growth. From Kazakhstan last week NBK Governor Marchenko indicated opposition to ‘speculative bets’ on KZT while in Ukraine last week Governor Arbuzov indicated that he did not see USD/UAH fluctuating by more than 2% this year. Last week parliament in Ukraine gave preliminary approval to a bill according to which the NBU will not be obliged to buy bank recapitalisation bonds at face value. Pension reform and hikes to gas tariffs must be tackled over the next 5 weeks if the authorities wish to conclude the next IMF review before summer recess.
Focussing on Croatia, EU foreign ministers are scheduled to suggest the closing of the last two accession chapters over Mon-Tues, paving the way for the EC to set in motion the formal conclusion of talks in June or July. Contrasting with this positive newsflow, on Friday we expect the flash estimate for Q1 GDP to show a contraction of 1.0% YoY. Croatia has yet to see a rebound in industrial production since the crisis, a reflection of poor competitiveness and a small industrial base. Correspondingly it is one of the few countries to see a ratings downgrade in the region in the past couple of quarters.
Lastly watch for Serbia’s sale of 18 month t-bills on Tuesday, followed by Romania’s 10 year bond auction on Thursday. Demand at last week’s t-bill auction in Serbia remained strong despite the recent disappointing privatisation newsflow while the rally in RSD only accelerated. Meanwhile local press reports indicate that the NBS may begin to buy EUR in an effort to slow RSD’s appreciation. We watch also for any newsflow on negotiations of an IMF precautionary agreement. Romania is an economy where we are more comfortable with BoP financing and see Thursday’s bond auction as offering an attractive opportunity to an improving macro story. Last week’s 5 year auction went well.
Country focus: Hungary‘s FX loan conversation The cost of agreement between Hungarian banks and the government on FX mortgages looks workable. The final announcement should come by Tuesday. On a longer term horizon broader agreement (which includes other elements as well as the CHF/HUF fixing) which re-ignites banking sector lending and encourages foreign banks to maintain their exposure to Hungary is crucial to HUF stability. In the near term following the recent under performance and cleaner positioning we believe risk reward has improved on bullish HUF positions.
Country focus: The Baltics in normalisation mode In the Baltics balance of payments trends very much reflected the boom bust nature of the last cycle. Multi year double digit C/A deficits were forced sharply into surplus by end-09 but current account surpluses have now peaked and we expect a shift back into deficit, albeit modest, over the coming quarters. Inflows of capital in the form of EU structural funds, a modest recovery in FDI and increased sovereign Eurobond issuance will facilitate this shift back into C/A deficit. Further efforts to consolidate fiscal policy are essential to ensure that the public sector does not crowd out the private sector and maintain the recent trend of ratings upgrades.
UniCredit Research
UniCredit Corporate and Investment Banking Unicredit Bank AG