HUNGARY: Long FX More Attractive Than Long FI Following Deficit Target Tweaks
HGBs remain under pressure following the revisions yesterday to the government’s deficit targets for this year and next, extending the sell-off and bear steepening seen during Tuesday trade – 10-year yields are now up close to 20bps over the past two sessions.
- While the revisions merely put the official forecasts more inline with market expectations, the significance here is mainly in the shift in communication from the government and what this means regarding its commitment to fiscal consolidation and avoiding sovereign rating downgrades. Yesterday, we noted that we see rising risks around Hungary's sovereign ratings ahead of upcoming updates from Moody’s (Nov 28) and Fitch (Dec 5).
- HUF slipped around 0.7% following the reports yesterday, but ING note that the subsequent partial recovery confirmed their view that additional spending before the April elections was expected by the market. They also say it suggests that this will not change the current long market view, adding that FX appears to be a safer place than FI in the current environment.
- Similarly, JP Morgan note that long FX is an easier trade than long bonds to hold for now. They remain overweight HUF but move to market weight HGBs (from OW), adding that the HUF carry trade should be well supported while Hungary’s exemption from US sanctions underpins currency strength.
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BOE: Greene says more concerned about food prices than energy
This is an interesting point. The research the MPC has been citing has suggested that food prices, energy and fuel prices have outsized impacts on inflation expectations. And the narrative had been that food prices were the more concerning recently. This seems to be the point that Greene is making - not that she would be more worried about food than energy if they were both increasing - but that food prices are more of the near-term concern.
- "*BOE'S GREENE: I AM MORE CONCERNED ABOUT FOOD THAN ENERGY PRICES
- *BOE'S GREENE: HOUSEHOLDS PARTICULARLY SENSITIVE TO FOOD PRICES" Bloomberg
OUTLOOK: Price Signal Summary - Recovery In Gilts Extends
- In the FI space, Bund futures rallied sharply higher on Friday confirming a resumption of the recovery that started Sep 25. The move higher reinforces a bullish theme and attention is on the next key resistance at 129.44, the Sep 10 high. Clearance of this hurdle would pave the way for a climb towards 129.58, 61.8% of the Jun 13 - Sep 3 bear leg. Initial support to watch lies at 128.64, the 50-day EMA. A break of this level would instead signal a reversal.
- Gilt futures rallied sharply higher on Friday confirming a resumption of the recovery that started Sep 25. The move higher reinforces a bullish theme and attention is on the next key resistance at 91.28, the Sep 24 high. It has been pierced, a continuation higher would pave the way for an extension towards key resistance at 91.82, the Sep 11 high. On the downside, price needs to trade below support at 90.26, the Sep 26 low, to reinstate a bearish theme. First support lies at 90.86, the 20-day EMA.
BOE: Headline From Greene Not Surprising Thus Far
Comments crossing from BOE's Greene, who is speaking at a Society of Professional Economists event. Thus far, not much too surprising. A reminder that Greene wrote an OpEd in the FT last week, where she flagged the idea of skipping a rate cut (in line with her recent comments and not a surprise at all).
"*BOE'S GREENE: ACTIVITY STRONGER THAN THOUGHT A YEAR AGO" Bloomberg
"*BOE'S GREENE: INFLATION AND WAGE GROWTH STRONGER TOO" Bloomberg
"*BOE'S GREENE: CONCERNED DISINFLATION PROCESS SLOWING" Bloomberg
