Trades of the week
CEE markets will continue to be driven by the EMU periphery crisis with Friday’s announcement by Germany and France likely helping the sentiment on the open on Monday. In terms of trade ideas: 1) We believe Romanian markets can recover relatively fast if the EMU periphery pressure eases and we remain positive on the multi month outlook (both in FX, rates and credit). Depending on the opening price action we would look to add further exposure through this weeks ROMGB auction. 2) Elsewhere the dovish CenBank backdrop should support local currency bond markets in some CEE countries. We recommend maintaining long duration in CZGB, mod long in HGB and look to increase duration in POLGB. We would not play the global slowdown story via the Turkish and Russian local currency market and recommend short duration in both. 3) In the FX space we recommend a long PLN/HUF position which should benefit from diverging CPI performance and in case risk appetite turns again we believe Hungarian financial stability risks are higher than the Polish one. 4) Finally for those investors who are looking for cheap hedge vs. EMU periphery we note that EUR/BGN forwards did not follow Bulgarian CDS spreads wider. Although we expect the currency peg to stay in place we believe the forwards can move wider and offer a relatively cheap hedge (1y fwd 110bp below the last 2y average, see chart).
Event & data watch: CenBank decisions in focus
As the EMU periphery crisis turned more systemic last week, Germany and France agreed to a voluntary private sector ‘re-profiling’ on Friday evening while Greece underwent a cabinet reshuffle. Given a strong close on Friday, this should facilitate a decent start to the week in CEE – price action last week acted as a firm reminder that CEE cannot indefinitely escape periphery woes while we also saw a continuation of a trend whereby central banks shift towards a more dovish stance. This was most obvious last week in Poland where despite a much higher than expected inflation reading, the NBP signalled that it would not react rapidly with another rate hike but would stick to its newly instated ‘wait and see’ approach. The data calendar in CEE is light this week, with focus on rate decisions in Hungary and Turkey on Monday and Czech Republic on Thursday. We expect all countries to leave policy rates on hold.
UniCredit Research