Jitters Return to EMEA Markets

After some relatively calm months in the EMEA markets, this week we have seen some jitters return with the zloty and the forint losing ground while the South African rand saw a major sell-off this week. In terms of the zloty and the forint, there certainly has not been panic in the markets but it is interesting that the CEE currencies have not performed better given the quite positive global risk sentiment of late. The sell-off in the rand is a reflection of increasingly violent labour protests and strikes which seem to be weighing more and more on investor perception of South Africa's creditworthiness.

We are not overly concerned about the zloty or the forint. However, in the near term, we would not rule out more weakness in both currencies - particularly if we see some general profit-taking on the global risk trades. Also, our EMEA FX Scorecard indicates that we could see further weakening in both the PLN and HUF down the road. It is the technical and macro scores in particular that weigh negatively on both currencies, especially on the short-term horizon.

The rand has been hit hard this week, losing more than 2% against the US dollar. There were not any particularly negative surprises out of the South African economy. Inflation in December, which was released this week, was in line with expectations (increasing to 5.7% y/y, up from 5.6% y/y in November). So the sell-off in the rand is a reflection of further negative newsflow regarding another violent riot in South Africa. That said, as our EMEA FX Scorecard shows that the technical score for the rand turned extremely negative, indicating further weakness going forward. Our EMEA FX Scorecard indicates that the USD/ZAR could reach 9.18 on a three-month horizon. Therefore we recommend being positioned for a weaker rand going forward.

Here we go again - yet another cut from MNB
When the Monetary Council of the Hungarian central bank (MNB) meets next week, it will once again be the government-appointed member who will be in charge and it will dictate yet another cut in the MNB's key policy rate - despite the fact that Hungarian inflation remains well above the MNB's official target of 3%.

Hence, we expect the MNB to cut its key policy rate by another 25bp to 5.50%. This is also the consensus expectation. Even though we are sceptical about the conduct of monetary policy in Hungary (which we think has become highly politicized), there are some arguments that justify further rate cuts - most of all the fact that there is no growth in Hungary and the economy is basically entering its seventh year of stagnation. That said, the fact that the economy is not growing is also a result of massive regime uncertainty and supply-side problems - something monetary policy can do very little to change.

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