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23 July 2010
EMEA Weekly
Hungarian foot-in-mouth politics
Fixed Income Outlook: More Hungarian mess next week? Source: Danske Markets
Looking into next week we have relatively little on the agenda in terms of
macroeconomic data releases, so the markets could continue to focus on the Hungarian
Inflation headed down further
situation and we fear that we could be heading for more volatility in the Hungarian fixed
income markets. 12 % y/y % y/y 12
10 Inflation, South Africa 10
8 8
6 6
FX Outlook: CZK stays on top 4 4
2 2
CZK continues to be the top performer in our EMEA FX Scorecard and the only real
0 0
bright spot in the EMEA FX markets. The Scorecard remains relatively negative on the 02 03 04 05 06 07 08 09 10
rest of the EMEA currencies and the most negative on the South African rand. The rand
Source: Danske Markets
is the currency that we are the most worried about. It looks fundamentally overvalued
and short-term indicators point toward a rand sell-off.
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Calendar
The editors do not guarantee the accurateness of figures, hours or dates stated above
Note that all releases are CET.
7
Source: Danske Markets
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On Thursday the South African reserve bank (SARB) decided to leave its key policy
rate unchanged at 6.50% – in line with the consensus expectation, but contrary to our
expectation of a 50 basis points cut. However, over the week South African rates are
down. See more on the South African rate decision here.
Preview: More Hungarian trouble in the pipeline
Looking into next week we have relatively little on the agenda in terms of
macroeconomic data releases so the markets could continue to focus on the Hungarian
situation and we fear that we could be heading for more volatility in the Hungarian fixed
income markets.
We are especially worried that the Hungarian government’s apparent disregard for the
concerns of international lenders and market participants could spark more volatility and
if we see yet another sharp move in the forint then we would certainly not rule out that the
Hungarian central bank might decided to hike interest rates in a “super hike” of 300-
400bp as on previous occasions where the forint has come under significant pressure. We
therefore recommend investors to be positioned for a further rise in the Hungarian yields
– especially at the short-end of the curve.
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FX Market update
FX performance one week
Preview: HUF is punished
HUF vs. EUR
The worst performing currency over the week has unsurprisingly been the Hungarian
EUR/USD 1-week
forint. Given the news flow, the sell-off in HUF should hardly be a surprise to anybody change
RON vs. EUR
and we are in fact surprised that the beating of the Hungarian currency has not been
Basket vs. RUB
greater than has been the case. Overall, we continue see a risk that EUR/HUF could move
CZK vs. EUR
above 300 on a one- to three-month horizon.
PLN vs. EUR
On the positive side, we have noted that the Czech koruna has been more or less unmoved TRY vs. USD
by forint volatility, which we consider as a sign of real strength for the Czech currency TRY vs. EUR
and we remain upbeat on the outlook for the koruna. ZAR vs. USD
That said when president Zuma this week said that the South African government the FX performance one month
level of the rand is “Occupying the mind” of the government and the rand is
ZAR vs. EUR
fundamentally overvalued – with most short-term indicators pointing toward a sell-off – it
HUF vs. EUR
1-month change
is very difficult to not recommend that investors should be short in the rand. The only
TRY vs. EUR
argument for a strong rand is basically that there are no arguments for a strong rand, so
RON vs. EUR
that the contrarian would be long on it.
Basket vs. RUB
Last week we recommended that investors Buy CZK/ZAR, based on our EMEA FX CZK vs. EUR
Scorecard. We are happy to maintain this recommendation going into next week and the TRY vs. USD
EUR/USD
Czech koruna is still the high scoring currency in our EMEA FX Scorecard, while the
rand remains the lowest scoring currency. Over the past week CZK/ZAR has been more -5.0 0.0 5.0 10.0
%
or less flat. Data updated: 23/07 - CET: 12:02
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FX Scorecard overview
Score PLN Score HUF EMEA FX Scorecard outline
5.0 5.0 All scores are computed on a scale
2.5 2.5 from +5 to -5. The score measures
0.0 0.0 how far from a mean point the
-2.5 -0.2 -2.5 -0.5
indicator is, measured by standard
-5.0 -5.0 deviation. A score is then combined
Technical
Global
Carry
Valuation
Technical
Global
Carry
Valuation
Macro
Macro
Total
Total
Technical
Global
Global
Carry
Carry
Valuation
Valuation
Macro
Macro
Total
Total
month rates and spread against peers.
Technical
Global
Global
Carry
Carry
Valuation
Valuation
Macro
Macro
Total
Total
Com
-5.0 -5.0
Technical
Technical
Global
Global
Carry
Carry
Valuation
Valuation
Macro
Macro
Total
Total
5| 23 July 2010
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EMEA Weekly
economy growing strongly since AKP came into power in 2002. Turkey has also emerged 35
% of all voters
35
strongly after the global credit crisis and even though inflation is still too high it is 30 30
nonetheless significantly lower than before AKP came into power. From an investor 25 25
Hence, overall international investors will be unhappy if AKP were to lose power in 15 15
10 10
2011. On the other hand, it should also be acknowledged that that the AKP government’s Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
Concluding, the markets would probably receive it negatively if AKP where to lose
power to a CHP-MHP coalition next year, but if a new government under the leadership
of the technocrat oriented Kemal Kılıçdaroğlu where to move fast to reassure the markets
that the overall policy framework – meaning fiscal consolidation and an independent
central bank – was unchanged then we believe that the negative market reaction would be
fairly short-lived. In fact we are more worried about whether AKP will turn in a
significantly more populist direction in the coming months to regain support so market
participant should start keeping an eye on Turkish politics, but for now there is no reason
to have sleepless nights over next year’s election.
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GDP growth improved to minus 2% y/y in Q1 10 from minus 9.5% y/y in Q4 09 and we Source: Reuters Ecowin and Danske Markets
expect the Estonian recovery to continue in the coming quarters. We expect average GDP
growth of 0.3% y/y in 2010 and 2.0% y/y in 2011. Return to the trend growth rate is
Temporary C/A surplus
expected in 2011.
5.0 5.0
Inflation has accelerated significantly in recent months, partly due to one-off effects 2.5 % of GDP % of GDP 2.5
0.0 0.0
related to rise in mobile communication prices and partly due to upside in energy prices. -2.5 -2.5
-5.0 -5.0
We now expect inflation to rise to close to 2.5% by the end of the year. -7.5
Current account, Estonia
-7.5
-10.0 -10.0
-12.5 -12.5
The current account is expected to turn to less positive during H2 10 as growth picks up -15.0 -15.0
-17.5 -17.5
speed during H2 10 and in 2011, we look for increasing trade and current account balance -20.0 -20.0
06 07 08 09 10 11 12 13
deficits.
Source: Reuters Ecowin and Danske Markets
Macro forecasts
1 Private. 1 1 1
Year Gdp 1 Fixed Inv Export Import Unemployment to go above 20%
cons
22.5 22.5
% %
2009 -14.1 -18.8 -34.4 -11.3 -26.7 20.0 20.0
17.5 Unemployment, Estonia 17.5
2010 0.3 -2.9 -2.6 20.8 15.0 15.0 15.0
12.5 12.5
2011 2.0 0.9 5.7 13.5 12.8 10.0 10.0
7.5 7.5
2012 3.6 3.2 6.1 8.9 9.9 5.0 5.0
2.5 2.5
1) Average % y/y 2) % of GDP 3) % of total work force 4) Export and import prices, EUR 06 07 08 09 10 11 12
Macro forecasts
Inflation jumps on one-off effects
Trade Current Industrial Unemploy 1 1
Year 2, 4 2, 4 1 3 Wages Inflation 12.5 12.5
Balance acc. prod. ment % y/y % y/y
10.0 10.0
2009 -4.1 4.6 -26.2 15.5 -4.6 -0.1 7.5 7.5
2.5 2.5
2011 -9.1 -1.3 20.5 17.9 -1.1 3.3 Inflation, Estonia
0.0 0.0
2012 -12.6 -5.2 12.3 16.5 1.7 2.7 -2.5 -2.5
03 05 06 07 08 09 10 11 12 13
Source: Reuters Ecowin and Danske Markets
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2011 2.0 0.9 5.7 13.5 12.8 -9.1 -1.3 20.5 17.9 3.3 Source: Danske Markets
2009 -6.3 -7.6 -6.3 -8.9 -15.2 4.3 0.2 -17.8 10.8 4.2
Hungary 2010 -1.9 -2.0 -2.2 12.1 11.2 5.7 1.8 9.5 13.6 5.2
2011 3.0 2.6 4.1 8.9 7.3 5.6 1.3 9.0 14.7 4.6
Latvia 2010 -4.7 -3.4 1.3 -0.5 3.5 - 4.5 - 20.0 -0.9
Lithuania 2010 -3.7 -2.2 -3.2 2.0 2.9 - 1.0 - 18.0 0.3
2009 1.7 2.3 -0.5 -10.6 -14.2 -1.0 -1.6 -3.6 11.9 3.5
Poland 2010 3.0 4.7 -10.6 4.4 3.1 -0.6 -1.1 12.6 12.4 2.6
2011 4.0 3.5 8.5 6.9 5.5 0.2 -0.5 10.0 12.4 3.0
2009 -7.9 -7.8 -15.9 -4.2 -29.8 7.4 3.8 -10.9 8.2 11.7
Russia 2010 3.6 4.5 1.0 24.0 19.0 7.5 4.5 5.2 7.9 7.0
2011 4.1 5.9 7.0 13.0 22.0 6.9 3.1 3.6 7.3 9.2
2009 -4.7 -2.0 -18.8 -5.3 -13.2 -4.0 -2.2 -8.9 - 6.3
Turkey 2010 7.9 6.7 17.9 6.6 12.6 -5.3 -4.7 10.5 - 9.0
2011 5.9 5.7 8.6 14.0 11.2 -4.7 -3.4 4.0 - 7.8
1) Average % y/y 2) % of GDP 3) % of total work force 4) Export and import prices
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Disclosure
This research report has been prepared by Danske Research, which is part of Danske Markets, a division of
Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The author of
this research report is Lars Christensen, Chief Analyst.
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high
quality research based on research objectivity and independence. These procedures are documented in the Danske
Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any
request that might impair the objectivity and independence of research shall be referred to Research Management
and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not
report to other Danske Bank business areas. Research analysts are remunerated in part based on the over-all
profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other
remuneration linked to specific corporate finance or debt capital transactions.
Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals’
Ethical rules and the Recommendations of the Danish Securities Dealers Association.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
Expected updates
This publication is updated weekly.
Disclaimer
This publication has been prepared by Danske Markets for information purposes only. It has been prepared
independently, solely from publicly available information and does not take into account the views of Danske
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