Lower-than-expected inflation reading boosts rate cut hopes in Hungary

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Currencies: Lower-than-expected inflation reading boosts rate cut hopes in Hungary

Czech Republic

The Czech Koruna strengthened slightly at the beginning of the week and EUR/CZK closed the session at 26.017. However, the reasons for enjoying the development were few. Confirmed industrial production fell by 22% y/y in May and there are no signals of any rapid improvement. The CNB Vice-Governor M. Singer in an interview expected this year’s GDP to fall by at least 3% y/y but further rate cuts seem to be increasingly difficult. Nevertheless, the domestic currency benefited from the improved sentiment on risky assets as was reflected in the global stock market performance and Central European currencies as a whole.

While the interview of the Vice-Governor may be a further plus for the Koruna, today's retail sales (-7.5% y/y) question an optimistic view. On the other hand, global sentiment remains optimistic and this may support the Koruna. Later on, US earnings together and the U.S. retail sales release should also play their role.

Hungary

On Monday, the more positive global equity market sentiment supported the Hungarian forint, too. The currency recovered to 275.00 overnight, up roughly 1% from yesterday’s level around 278.00, broadly in line with the emerging currency market moves.

The June inflation data were better than expected this morning as the Y/Y figure actually decreased to 3.7% from 3.8% in May. Expectations were for a 4.0-4.1% reading. It seems that the recession has really started to bite into inflation. This could strengthen rate cut hopes, while the high real yield due to the 9.5% base rate could also make the currency more attractive.

Poland

The Polish zloty decoupled form the firming Hungarian forint and was only little changed at the beginning of the week. Comments about the timing of the possible fulfillment of the Maastricht criteria for euro entry from government officials were only interesting domestic events for the market. It seems that there is a consensus among the NBP and government members that Poland will not be able to meet the budget criteria until 2011.

Today, the domestic calendar becomes very attractive as the June CPI and the May C/A figures are on the agenda. While we do not have a strong view on the upcoming inflation figure, we think that the C/A might post a visible surplus. This could help the zloty to catch up yesterday’s gains of the forint.

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