CEE currencies hit by Latvian fear

Headlines

Currencies: CEE currencies hit by Latvian fear
Fixed Income: Czech CPI dips in negative territory, governor sees monetary easing

Czech Republic

The Czech koruna remained under downward pressure and extended its losses yesterday. The koruna still has to cope with the ongoing dovish campaign of the central bank. In this respect it was interesting to read an interview with the CNB governor Tuma, who said there are six or seven possible ways to relax monetary policy for correcting an undershooting of the 2% inflation target but that intervention against the currency is probably one of the main instruments that would be considered. If the exchange rate remained at a strong level, he said, it would push the inflation rate into negative territory. It might not be a temporary matter this time, he said, and this is why he proposed an interest rate cut at the last CNB meeting. In our view the interview confirmed that the CNB is going to cut its repo rate (by 25 bps) at the next meeting, while the bank board will open the door for direct forex interventions and buybacks of government bonds.

While the koruna suffers from the CNB dovish campaign, the Czech fixed income market really enjoys it. Yesterday, the yield curve flattened in a bullish fashion and positive sentiment should remain firmly in place as the September inflation readings (released this morning) proved that the inflation picture (and outlook for several months or quarters) is very bright. The month-on-month inflation rate dipped by 0.4 % in September and the headline year-on-year inflation rate hit zero.

Hungary

The Hungarian forint continued its gradual weakening trend and slid to below the key 271.00 level. Prospects about phasing out the easy monetary policy in the US has contributed to the uncertainty on local markets and some investors started to close positions, just to be safe. We think this could be a gradual weakening trend that may last for several weeks as the carry trade had been popular in recent months.
The gloomier sentiment was reinforced by the smaller trade surplus in August, which shrank from €500m to €270m. The strong currency and filling of the underground gas storage facilities could have been behind the shrinkage, but nevertheless a less optimistic external balance picture may also allow the currency to weaken.

The Hungarian fixed income had a bit of a rally on Thursday due to the strong demand on the auctions. On the three auctions bids totaled Ft163bn almost three times the offered Ft60bn. The currency weakening however could make the outlook less promising as central bank rate cuts also depend heavily on a stable currency, thus the weakening may hurt the short-end of the curve.

Poland

The Polish zloty stayed in negative territory on Thursday as the Latvian fears continue to weigh on the market. The renewed worries that Latvia could devaluate its currency re-emerged after the country failed to sell T-bills in their auction on Wednesday. Beside the Latvian fears also the domestic political turmoil does not help. On Wednesday, the Polish prime minister sacked three ministers in reaction to the lobbying scandal. The pair failed to come back below 4.21 (2008 highs) and shoot as high as 4.26 EUR/PLN.
As the Baltic fears may still linger on, we do see the risk of further weakness today. Nevertheless the optimism on global equity markets may limit the space for the bears.

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