The massive sell-off in equity markets in the wake if the coordinated rate hike marks the next, possibly most dramatic stage of the financial turmoil to date. Coupled with rumors on the nationalization of OTP which spurred the panic selling of the HUF, the impact on the zloty was profound, to say the least. The EUR/PLN soared from 3.42 early on Thursday to 3.65 early today. Low liquidity was partly to blame, given that the move took place already after the end of the session in offshore trading. With extreme liquidity concerns likely to remain part of the financial market landscape for the foreseeable future, the short term outlook for the zloty is unclear at best. The global sentiment and the HUF will be eyed closely at this juncture.

The Hungarian forint fell to 262-264 overnight, almost 4% down, as fears about OTP scared investors. The largest Hungarian bank was rumored to have gone into receivership, the stock fell 15% in late trading. The government has been denying any rescue plan and press reports are writing that speculation is mainly behind as short selling is still allowed in Hungary. Fear will likely spread today and after news that South Korea has difficulties to obtain foreign currency liquidity, Hungary is probably risking a currency crisis and further meltdown of its financial markets. Co- ordinated actions from the government and the central banks could be needed to help markets, while large foreign currency indebtedness makes the country vulnerable.

The Czech koruna received a mild support in the morning owing to the consistent decision of the CNB not to cut their key rates. However, the CZK strengthening (below 24.60) was only temporary. In the second half of the session, the crown fell victim to weakening, spilling over to the whole Central Europe from the Hungarian forint. The currency pair EUR/CZK headed to the north, testing resistance at the level 25.50. Also today, we expect an ongoing battle for breaking the resistance level. Escalation of Hungarian troubles (that is quite possible) coupled with dollar strengthening can help to achieve this target. The success, however, need not be long-lived as the CZK can quickly pick up its safe haven role in current turbulent times. The Slovak koruna continued in its gradual down-move, finishing yesterday’s session at EUR/SKK 30.54. The main reason – as in previous days – was the position closing by foreign banks. Today, the eco calendar contains two interesting figures – inflation and foreign trade. The annual inflation rate should slightly decelerate in September to 4.9% on the back of cheaper food and fuel prices. The trade balance, on the other hand, should be once again in red figures. Based on Wednesday’s industrial output outcome, the result might be even worse than the market consensus. Fixed income Polish bonds suffered massively from the zloty sell-off yesterday as yields soared by up to 10 bps across the curve, despite rising expectations that the NBP might start its easing cycle earlier than previously expected. The curve steepened in a bearish fashion and the meltdown is likely to be continued if the PLN continues losing ground today.

The Hungarian bonds had a complete meltdown as market makers stopped quoting prices and market has effectively been frozen after yields spiked to above 10%. Interest rate swaps have also been going up steeply, but ASW spreads are still wide about 200-250bps, so there is a lot of room to catch-up for them. The Czech yield curve flattened slightly in a bearish fashion as contrary to market (and our) expectations the CNB decided by not formally considering an interest-rate cut on its non-interest-rate setting meeting. Clearly by adopting extraordinary measures now, the CNB would be pulling the rug out from under itself after insisting that Czech banks are safe and sound. Hence, the 25 bps rate will be delivered on a regular meeting at the beginning of November.

KBC