Hungary

Domestic bond yields in the three major central European markets have recently inched up more than their German counterparts. This is despite economic growth staying quite weak in CE3. What should investors make of it (Chart 1)? Chart 1…

The disinflation process is over in Poland and Hungary. Only the Czech Republic will see its core inflation meet its central bank target this year. The reason is much tighter labor market dynamics in the first two. Investors should continue to short a basket of CE3 currencies vis-à-vis the US dollar.

Real wages are set to rise in CE3 economies with implications for their asset markets and currencies. Of the three, Polish assets and the zloty are the most vulnerable.

The growth and inflation profiles of the three central European countries are set to diverge. The outlook for Polish and Hungarian Bonds are not attractive anymore. Book profits on them. Instead, initiate a new trade: pay Polish / receive Czech 10-year swap rates.

It’s time to go overweight Hungarian domestic bonds in an EM and European core bond portfolios. Currency investors should book profits on our long CZK / short HUF trade, which has generated 29.4% gains since its inception in June last year.

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