News
HU: Positive – EconMin Matolcsy announces new cooperation with the IMF / Positive – HGB auctions attract strong demand (p2)
LT: Neutral – IMF published Article IV Consultation (p2)
RO: Negative – MinFin to postpone a USD MTN issue planned for late November / Mixed – MinFin sold RON 296mn 3Y GBs: avg yield 7.48%, bid/cover 2.1 (p2)
Today’s Events
HU: Sep Wages, Nov Business Sentiment / LT: 3Q Unemployment / PL: Oct Unemployment and Wages / SL: Oct PPI / UA: 3Y, 5Y and 10Y USD linked GB auctions
EEMEA Markets
Hungary: the main even of the day was undoubtedly the announcement from EconMin Matolcsy that Hungary is seeking a new co-operation with the IMF. Although later in the day the fund confirmed that Hungary did not officially ask for a new loan we believe from the above statement it will be difficult for the government to step back. The initial comments from the EconMin suggest that Hungary will look for flexible credit line or precautionary credit line. We however doubt that the IMF would provide further funding without stronger conditionality and hence look for lengthy negotiations and plenty of noise during the process. The market reaction was clearly positive with HGB yields tanking more than 50bp whilst EUR/HUF dropping by about 2.5%. The reaction in the credit market seems to be more muted as 5y CDS tightened by only about 15bp.
Looking at the various Hungarian asset classes we believe the HUF is still a clear candidate for further short squeeze. One way to asses the current bearish positioning of the market is to look at risk reversal spreads in FX options. If one compares a standard 25 delta, 3M risk reversal spread of EUR/HUF versus EUR/PLN it is clear that the HUF market is still heavily positioned for higher EUR/HUF (see our chart). We hence believe there is still scope for further significant drop in EUR/HUF and hence would still look to buy EUR/HUF put options which remain relatively cheap hedge at this stage. We also believe that several HGB holders hedged their FX exposure instead of selling HGBs during the last three months. Accordingly we expect the FX market to outperform the HGB market (muted reaction in the credit market was already evidenced yesterday).
Bottom line: despite the likely tough negotiations with the IMF we believe significant bearish positioning in the HUF market suggest further downside scope for EUR/HUF which should outperform the yield performance. The cheapest way to exploit this backdrop is still via EUR/HUF put options (see our yesterday’s daily). For investors who currently hold deep U/W HGB positions we recommend buying 3M EUR/HUF put options with 285 strike price.
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Gyula Toth
UniCredit Research