Koruna trades at 5-month lows ahead the key CNB meeting

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Currencies: Koruna trades at 5-month lows ahead the key CNB meeting
Fixed Income: Is the Czech bond market ready for a negative correction?

Czech Republic

The EUR/CZK pair returned back to the 26.60 level on Friday as the story about the koruna didn’t change. The Czech currency traded close to its five-month lows, because of worse sentiment in global (risky) markets and market fears ahead of the upcoming CNB meeting.
This will be the domestic eye-catcher of the week. Although the Czech Republic also sees the first signs of recovery, given the greater openness of the Czech economy, its decline was deeper and its recovery is also likely to be slower. In addition, the Czech Republic is far from being encumbered with increased inflation and, just like the euro area, it is more likely to struggle in keeping inflation in the positive territory in the months to come. The statements by Governor Tůma and Deputy Governor Singer were also clearly influenced by concern about inflation being too low to hit the target. Apart from the possibility of another (25bps) rate cut, the central bankers will also discuss alternative options for further easing the monetary policy. The most likely alternative appears to be direct forex interventions against the koruna; however, this will probably not happen in the end, because this threat and verbal interventions alone have already weakened the Czech currency significantly over the last month and eased the inappropriately tightened monetary conditions.
Such an outcome of the interest-rate setting meeting could be slightly positive for the koruna, but it could be a reason for more intensive profit-taking on the Czech bond market.

Hungary

The Hungarian forint had a short recovery on Friday, which did not last long as the bearish sentiment on equity markets persisted. The pair slid to 275.50 overnight where it opened this morning. The 275.00 level has been a key support in the last 3- months and thus this week’s key question will be whether it is able to hold on to this level again or the weakening trend could surpass it.
Today’s PMI figure backs to weakening trend with a lower October reading of 48.2, down from 49.0.

The Hungarian fixed income market had a small recovery of about 5-10bps as the currency stabilized a bit, but this could be short-lived if the forint stays above the key 275.00 level.

Poland

The Polish zloty came under renewed pressure on Friday. The sell off on the global equity markets triggered negative reaction on the Polish FX market. The pair shot higher to the 4.27 EUR/PLN, but was not interested in going further.
The domestic scene is empty for the whole week. Hence Wall Street should be the main driver of the sentiment on the Polish markets. The global calendar with US ISM, payrolls, Fed and ECB should be in focus. We believe in somewhat positive sentiment on the markets at the beginning of the week and even later the zloty should be one of the most resistant currencies in the region.

Ukraine’s President defied warnings of the IMF and approved an increase in social spending that will balloon the government deficit. In a response, ratings agency Standard & Poor’s downgraded its outlook for Ukraine. While it may potentially have some negative impact on sentiment surrounding the zloty, the market took the development into its stride without much fuss.

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