The last Monetary Council meeting at the Hungarian central bank (MNB) brought a bit of a surprise when the majority of council members voted to keep rates unchanged rather than to hike them, which had been the wish of three of seven members and the expectation of analysts (including us).
In our view, the outcome of the vote shows that the MNB’s Monetary Council has become politicised. The four members who voted to keep rates on hold were all appointed by the current Hungarian government, while the three members that voted for a rate hike are not government appointees.
The question from a market perspective is not really whether the decision to keep rates on hold was correct or not but rather whether the central bank is truly independent or not. We believe last month’s vote indicates that the MNB’s governing body has already lost its independence – even leaving aside the controversial recent changes to the central bank. The new central bank law has been strongly criticised by the EU.
Given the politicisation of the Monetary Council, it is harder to forecast the MNB’s next move. However, we feel relatively confident about the outcome of the next rate decision. First, the four government-appointed Monetary Council members are unlikely to have changed their views on rates. Second, the recent fairly strong rebound in the Hungarian forint has probably eased a little inflation fears and fears concerning financial sector stability among the three other Council member – including MNB chief András Simor. As a consequence, we expect rates to be kept unchanged at the coming week’s Monetary Council meeting and we do not expect any of the members to vote for hikes.
The consensus expectation is also for rates to be kept unchanged and, as such, we do not expect any market action on the back of the announcement. Therefore, we believe the focus is likely to turn to the negotiations for a new EU/IMF loans package and to the still-unsettled issue of the new central bank law.
We are turning moderately less bearish on the Hungarian markets but the discussion above illustrates that political risk clearly remains in Hungary and once again this could hit market sentiment. As a consequence, we are still not willing to move to an outright bullish view on the Hungarian markets.
FX update
This week we published new forecasts for the emerging markets currencies in Emerging Markets Briefer – February 2012 (22 February), including new forecasts for the EMEA currencies.
The overall picture is that our forecasts are turning more bullish. In general, there are three main drivers of our more bullish outlook for the EMEA currencies. First, with the ECB having moved in a significantly more dovish direction as a result of the stepping up of monetary easing in December (the so-called LTRO), the fears over the euro crisis are easing. This is directly and indirectly supportive for the CEE currencies. Second, with the ECB and the Federal Reserve now quite clearly committed to maintaining low interest rates and a general dovish stance in monetary policy, carry trades in the EMEA currencies – where rates are generally somewhat higher than in the eurozone – are becoming increasingly attractive. Third, as a result of the better European sentiment, sentiment is also changing in the EMEA markets and this has supported the momentum in the EMEA currencies in general.
Both the carry story and the positive momentum are visible in our EMEA FX Scorecard. It is especially notable that the technical score and the carry score have turned decisively more bullish recently, particularly for the PLN, HUF and TRY.
Furthermore, the more positive outlook is also reflected in the overall FX score being positive for six out seven currencies covered by the scorecard.
Our main worry – leaving out the euro crisis – is that the valuation of the EMEA currencies is not as attractive as a month ago. That said, we can hardly talk about the EMEA currencies being overvalued and we, therefore, expect a bullish trend in EMEA currencies in the coming one to three months, even though it is likely to be less brisk than over the past month – unless of course the ECB (once again) prematurely makes a decisive move in a more hawkish direction. That would probably make the euro crisis flare up again and that would hit the CEE currencies particularly hard.
Fixed income update – EM Bond Snapshot
Today we published EM Bond Snapshot – February 2012: Growth and carry is the name of the game.
A month ago we signalled a more bullish outlook for the emerging markets (EM). In general, this has been the right view and EM FX and fixed income have performed well over the past month. We remain relatively optimistic on the general EM outlook, especially as it seems that the ECB has now moved in a significantly more accommodative direction. This is significantly easing fears about the eurozone crisis. Even though we are feeling more confident about the general recovery in risk appetite and remain fairly bullish on EM FX and fixed income, we have not dramatically changed our relative allocation compared with last month. We are still overweight Turkey, Poland and Russia. However, Brazil also now joins the group of countries that we have on overweight. A month ago we put Brazil on a “neutral” weight. We maintain a neutral weight on Mexico, while we also maintain our underweight view on South Africa and Hungary.
Overweight: Brazil (+7.1%), Turkey (+5.2%), Poland (+4.1%) and Russia (+3.8%)
All of our overweights are strong growth stories and have relatively high interest rates, so to some extent this is a high-growth, high-carry trade. However, it also goes for all four countries that fundamentals are relatively strong and for Brazil and Russia rising commodity prices are also helpful. For Turkey and Poland in particular there is a bias for monetary tightening but we think this is mostly reflected in market pricing, so we do not expect any nasty surprises on the yields.
Neutral: Mexico (-0.1%)
We maintain a neutral weight on Mexico but we are generally turning slightly more positive on the outlook, especially for the Mexican peso, as the continued recovery in the US economy is likely to have a quite positive impact on Mexican growth. On the negative side, we note in particular the continued increase in inflation on the back of especially negative supply shocks. In our view, this gives some upside risk at the short end of the Mexican yield curve. Our neutral weight on Mexico also partly reflects some hedging against our overweight of Brazil.
Underweight: Hungary (-4.9%) and South Africa (-15.2%)
We remain underweight Hungary and South Africa. That said, we are less worried about the outlook for the Hungarian market in particular, especially because worries over the situation in the eurozone have eased. As a consequence, we have reduced our underweight on Hungarian bonds moderately compared with a month ago. Our biggest underweight is South Africa. The key reason for our rather large underweight on South Africa is the rather bleak outlook for the South African rand.
More on our country views can be seen in the latest Emerging Markets Briefer, 22 February. The table below gives an overview of our EM Bond Snapshot and recommended bonds.