What to expect in FX and rates markets
We expect choppiness in the EUR/HUF market in the coming days until the dust settles on the fiscal announcement. After that, we might see investors purely focusing on the result: a rebalancing in the fiscal stance. With simplified, cleaned-up forward guidance, the NBH might be able to bring calm to the HUF market after the rate-setting meeting. Though flipping the market's scepticism could prove very difficult and would take a masterstroke of communication to trigger such a turn immediately. We see EUR/HUF around 390 in the short run with a possible quick move to 380 should we see the NBH making a bold move in the 1-week deposit rate and/or hitting a home run with its forward guidance.
On the rate side, we see room to go higher again given our view that the market is underestimating the central bank's monetary tightening, especially in the short term. In that sense, short FRA payers still make sense to us, however, low liquidity and the high cost of holding may be a problem. Therefore, it may be more beneficial to look beyond the terminal rate horizon currently priced in, meaning the 1y-3y segment with neutral or positive carryroll. Although we believe the NBH will deliver a rate cut sooner than the market currently thinks, next week's meeting is too early to change the market direction in our view.
On the bond side, the focus will eventually shift to the improved fiscal balance, thus a lower risk of excessive financing needs. This, along with our view that the looming rule-of-law debate will be settled, with positive news of an agreement starting to trickle in possibly in mid-3Q, could be good news for Hungarian government bonds. We have seen a significant tightening in asset spreads over the past week, however, we believe HGBs have further potential for richening given the market's reassessed view on bond supply and the delayed reaction to the IRS curve move.
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