Morning Note /

EMEA Daily: All eyes on the ECB's policy update today

  • Ukrainian missile strike cripples Russia's Black Sea flagship

  • CEE currencies on the front foot ahead of ECB update

  • CBRT expected to keep benchmark policy rate unchanged today

Danny Greeff
Danny Greeff

Financial Market Analyst

Edmond Muzinda
Daron Hendricks
ETM Analytics
14 April 2022
Published byETM Analytics

All eyes on the ECB's policy update today

Talking Points: Ukrainian missile strike cripples Russia's Black Sea flagship

Global: Heading into the Easter long weekend, the spotlight will be on the ECB as it concludes its April policy meeting. It is widely expected that President Christine Lagarde will reiterate the central bank's message from the previous meeting that it would remain on course of monetary normalisation despite the war in Ukraine. She is unlikely to provide much clarity on the timing of rates lift-off, but will likely continue to signal a move in the second half of this year. Investors will also be watching closely for any clues on when the ECB plans to draw a line under its quantitative easing programme, having only said that it could do so as soon as Q3 at its previous policy meeting.,

South Africa: President Ramaphosa described this week's flooding in KwaZulu-Natal as a catastrophe, with more than 300 people dead, infrastructure damaged, and economic livelihoods destroyed. The social and economic impact of this will be severe, but so too will be the cost to the fiscus as roads, bridges, water reticulation, and electricity infrastructure need rebuilding. The overall impact of all this cannot be understood at this stage, but there are serious concerns that transportation routes to SA's busiest port have been destroyed or severely disrupted.

Turkey: Today, the focus falls on the CBRT, which will provide an update on monetary policy later on. The central bank is likely to leave the policy rate unchanged at 14.00% despite inflation sitting at a 20yr high and real rates deep in the negative, making the economy increasingly vulnerable at a time of intensifying global monetary policy tightening. Recent comments from the Turkish Treasury and Finance Minister Nureddin Nebati that the rise in inflation is transitory and interest rates have reached an appropriate and manageable level suggest that the government supports the lower interest rates. With the government having a stronghold on the monetary policy, interest rate hikes are unlikely to be on the table anytime soon.

Russia: Russia's army suffered a major setback when a Ukrainian missile struck its missile cruiser Moskva. This comes as the US announced a further $800m in weaponry would be sent to Ukraine. Russia continues to find military advancement difficult and may resort to the use of weapons of mass destruction. With peace talks reaching a dead-end, it is now clear that this war is set to roll on and that the disruptions it will cause will persist for some time to come. However, military action appears to be more concentrated in the South East now.

Hungary: The Council of the European Union approved an amendment to the law that will allow EU member states to receive a total of EUR3.5bn more this year to facilitate the reception of refugees running away from the Ukraine war. The measure will allow quick access to EU funds for infrastructure, housing, employment, education, health, childcare, and social inclusion. Hungary, which has accepted refugees fleeing the war will likely receive about EUR300mn (HUF100bn). These funds will help ease the burden on member states whose public budgets are under pressure so that they better manage this influx of refugees. 

Poland: The Polish parliament committee backed NBP Governor Adam Glapinski for another term in office yesterday. Glapinski's narrowly secured endorsement of the lower house as reappointment was supported by 27 of 54 committee members, with 26 voting against and one member abstaining. Keeping Glapinski in the office will be welcomed by the markets as it ensures monetary policy continuity. Speaking at the parliamentary public finance committee, Governor Glapinski signalled that the central bank would continue to tighten monetary policy to lower inflation mid-term. The central bank chief was quoted saying that "the first goal at the moment is lower inflation mid-term… bringing it to the target, even taking into account increased government spending related to the war in Ukraine."

Czech Republic: The Czech Republic's current account (CA) swung into a deficit in February, but worse than feared as the outlook for the export-reliant nation becomes less rosy with energy import bills rising amid soaring oil prices. The CA shortfall stood at CZK5.84bn in February, following a surplus of CZK7.74bn in the previous month. The median Bloomberg estimate was for a CZK3.50bn shortfall. According to the Czech National Bank, exported goods and services only marginally offset the value of goods imported during the month, which may not be the case in the months ahead as the nation is particularly vulnerable to soaring fuel and raw material costs. Meanwhile, the capital inflow in the financial account amounted to CZK22.2bn. Due to the war, there will likely be a strong outflow in March, which adds to uncertainties about the economy's recovery from the pandemic.

Forex: CEE currencies on the front foot ahead of ECB update

 South Africa: The ZAR was unable to capitalise on broad-based USD weakness yesterday, depreciating around 0.30% through the session to close back above the R14.5000/$ mark. One reason for this was the weak retail data out of SA yesterday, which showed sales plunged on both a month-on-month and year-on-year basis in February. While weak local demand can support SA's trade balance, it also pointed to limited scope for SARB rate hikes in the months ahead. Heading into today's local trading session, the ZAR bulls are in charge after China's state council again hinted at imminent monetary easing, with the USD-ZAR trading around the 14.5000 mark. Position-taking may well settle down into the long weekend, although there is no obvious reason for the ZAR to come under significant selling pressure today.

Turkey: The slide seen in the USD-TRY recently came to a halt yesterday, with the pair trading relatively flat at 14.6015. Ahead of the local open, the pair remains relatively flat as investors prefer the sidelines ahead of the CBRT and ECB MPC meetings slated for later, which have market-moving potential. Notwithstanding the steady performance, the TRY remains under pressure from running away inflation, a high commodity-import bill and rising UST yields. The CBRT keeping rates on hold adds another ingredient to this explosive mix, which could make the local currency tumble in the coming months.

Russia: The RUB traded steadily around 80.00/$ yesterday, still supported by high oil and gas prices and capital controls. While the currency may remain stable around these levels in the near term, it is expected to trade with higher volatility down the line, with substantial room for its weakening in the longer run.

Hungary: The EUR-HUF bears were in control for the third consecutive session on Wednesday on the back of a weaker EUR against the USD, easing of China's lockdown restrictions which boosted risk sentiment and prospects of further rate hikes by the NBH. The cross slipped by 0.12% after rejecting a move higher intraday. However, the marginal losses in the cross signal that momentum to the downside is weak amid a cautious undertone in the market as investors await the ECB rate decision slated for later today.  

Poland: The EUR-PLN pulled back further yesterday, extending its losing streak to two straight sessions. Intraday, the pair was subject to some whipsaw action before ending the day 0.13% below the previous close at 4.6379. However, the pair remained rangebound. The marginal losses suggest that investors were being cautious as they wait for the ECB meeting, which has the potential to be fairly market-moving for the common currency. Overnight implied vol levels surged ahead of the local open, climbing to 12.44%. This suggests that the options traders are uncertain about the upcoming event and are charging a higher premium to protect themselves against possible PLN weakness.

Czech Republic: The EUR-CZK traded in a tight range yesterday as investors assessed the CNB Governor's remarks for further interest rate hikes, with the pair finishing marginally lower at 24.421. With the inflationary environment and policy tightening, investors remain cautious and are preparing for the ECB rate decision later. As a result, the EUR-CZK is bid this morning, but it will remain in a narrow range should it fail to break above the 24.500 level.,

Fixed Income: CBRT expected to keep benchmark policy rate unchanged today   

South Africa: FRAs continued to be received lower in the middle to longer dates, with the curve exhibiting a flattening bias. Yesterday's weak retail sales, the strength in the ZAR, and inflation that remains within the SARB's target band will see investors rethink the amount of tightening priced in. This theme may well extend through the next few weeks as the curve adjusts to SA's inflation and growth reality.

Turkey: Turkish bond yields declined across the board on Thursday, tracking US Treasury yields lower through the session. Moves were largest at the belly of the curve, where the 3-year bond shed around 140bps from its yield on the day. Today, the focus will likely fall on the short-end of the curve as the CBRT is scheduled to provide a monetary policy update. Although no changes to the benchmark interest rate are expected, forward guidance may still be market-moving.

Russia: Russian bonds attracted some strong demand on Wednesday, with yields falling across the curve throughout the session. Moves were, however, particularly pronounced at the short-end of the curve, leading to a bull-steepening bias on the day. This stands to reason as short-end US Treasury yields have fallen sharply in recent days, with most EM markets tracking these closely.

Hungary: Bidding interest was seen across Hungarian bonds on Wednesday, with yields dipping across the curve driven by the falling UST yields as speculators cooled down their rate hike expectations. HGB yields fell for the second consecutive day, with a more significant drop recorded at the belly and long end of the curve. The 5yr and 10yr tenor yields decreased by more than 13bps and 12bps, respectively. Meanwhile, the 3yr tenor's yield was down about 8bps to 6.9685%. As a result, the flattening bias saw the 10v2 spread invert further to around a negative 38bps, its lowest level in almost two weeks. It is worth noting that the rally in the local bonds is likely to be short-lived amid the lingering geopolitical risks after Russian President Vladimir Putin promised to continue with the war in Ukraine. An additional headwind weighing on the local debt is the hawkish bent by major central banks, stoking rotation towards haven assets.

Poland: Commenting on the bond market, NBP head Glapinski also told the parliamentary committee that the central bank and the Finance Ministry are monitoring the bond market situation and expect the situation to deteriorate. Polish bonds have come under pressure this year mainly on the back of the high inflation, which saw the central bank embark on a rate hiking cycle. The situation in Ukraine, which fanned energy costs higher and interest rate increases in the US, has added a layer of headwinds to the domestic debt market as investors rotate to safe havens. As a result, yields have risen significantly across the curve, with more pronounced increases evident at the front end of the curve. For context, the short term 2yr bond's yield has climbed more than 281bps so far this year, which compares with a zero increase during the same period last year. Meanwhile, the 10yr POLGB yield drifted higher by more than 251bps versus 32bps comparatively last year. With the risk to the inflation outlook still tilted to the upside, further interest rate hikes could see yields continue heading higher. 

Czech Republic: Czech bond yields fell yesterday as a volatile market consolidated after monetary tightening expectations recently drove borrowing costs to their highest in more than a decade. The CNB Governor's remarks alleviated some of the fear of further aggressive interest rate rises, with investors likely reducing their rate hike bets. Putting aside monetary policy and focusing on the nation's economic growth outlook, Czech bond yields are likely to stay around their current levels in the short term, as downside risks to the economy persist due to the Ukraine war.