Czech central bank may intervene against the koruna

Headlines 

Currencies: Czech central bank may intervene against the koruna
Fixed Income: Further rate cuts are not excluded according to Czech governor

Czech Republic

The Czech koruna received another hit from central bank governor Tuma, who did not rule out a direct forex intervention against the currency yesterday. As a result the EUR/CZK pair bounced above the 25.50 level.\par
Clearly, the governor knows that with the strong currency the inflation outlook becomes so bright that the economy might even flirt with deflation. Since the CNB cuts have not translated in lower interest rates for corporate and retail sector the central bank must consider other options how to ease its policy. The obvious solution would be for a small open economy to depreciate the currency. In our view, a direct CNB's intervention is not an immediate threat, though it can not be ruled out - especially, if the EUR/CZK pair dips back to the recent lows at around the 25.0 level. All in all, given the aggressive dovish comments the koruna will continue to underperform its regional peer's. On the other hand, such environment will become very positive for Czech bonds, which might speculate more and more on a rate cut in November. Moreover, the CNB might even consider buying government bonds.

Hungary

The Hungarian forint started the week in an unchanged mode around the 267.50 level. The day’s news were that the central bank is planning to introduce tighter rules for retail lending by maximizing the monthly payment at 30% of the household net income and requiring banks to ask for 70% LTV ratio. These administrative measures are slightly different from the EU Commission work about capital requirement, but could be more effective in practice as domestic banks may not be able to round the rules with special products. It could also help to safeguard the improving household saving ratio and maintain it at a healthy level.
The other news was that the general government deficit hit 107% of the full-year target in September, in line with the Finance Ministry’s earlier projection, which is targeting a surplus for the last quarter due to the December inflow of corporate income taxes.

The Hungarian fixed income did not change on the day as neither the budget news nor global factors affected them. The 6-week T-Bill auction attracted lower than usual demand with a slightly below 2.0 bid-cover ratio as probably the market has been less interested in the rate cut debate since the 6% bottom view has become the consensus

Poland

The Polish zloty led the region gains as the last week’s government deal with Dutch company Eureko continued to help the currency. The investors are now assured that no huge dividend payment floods the market. Nevertheless the main driver of the move was the overall come back of the bulls on the global equity markets that attracted investors’ attention to the CEE currencies as well. EUR/PLN fell again under the key 4.21 barrier.
We continue to look closely to what happens with the 4.21 EUR/PLN barrier. In case of global markets optimism the deal with Eureko could easily mark the end of short – term bearishness on the Polish FX market. Nevertheless we remain cautious with our short term conclusions and would like to see a clearer break below the 2008 highs. This and next week the domestic calendar is more or less empty hence the decisive factor should be the equity market’s reaction on the US earning season.. 

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