Forint hits all-time lows against the Swiss franc

Headlines

Currencies: Polish GDP surprises on the upside thanks to strong domestic demand
Fixed Income: Forint hits all-time lows against the Swiss franc

Czech Republic

The koruna started the week on a weaker note. In line with other Central European currencies, the CZK was under pressure due to higher risk aversion and losses of the euro against the dollar. The currency pair EUR/CZK thus moved from the level of 24.73 up to 24.804. CNB’s vice governor, Mr. Holman, considering the option of raising the interest rate at the end of this year had only a very limited effect on the currency (and on the fixed-income market too). At the same time, any significant losses were prevented by a better than expected growth of Polish GDP.

Today, the domestic calendar is empty again. Hence, the koruna will be affected by the developments in core and regional FX markets (particularly by the forint). The domestic fixed income market will probably wait for tomorrow’s bond auction (of the 5Y benchmark) and a release of the issuance calendar for the third quarter of the 2010.

Hungary

The Hungarian forint initially had a quiet day on Monday at the EUR/HUF level of 284.00, but the appreciation of the CHF put pressure on the currency as investors are looking for the weakest link to hedge against in case risks would increase over the coming weeks. This pushed the HUF to a new 2-month low close to 288.00 in the overnight session, which is close to this year’s record low of 292.00.

The risk in Hungary is that 90% of foreign currency borrowers have the loan denominated in Swiss franc and therefore the exchange rate has a negative effect on the purchasing power of households and on growth. Domestic demand is already depressed and further compression could hurt the thin recovery, while the external balance is already in a large surplus including a current account surplus.

The Hungarian fixed income market continued to trade weaker on the currency and yields are above the key 7.25% level at maturities above the 5-year tenor. Given the outlook on the currency market, bonds may continue to struggle in the current environment.

Poland

The domestic event of the day was the release of the Polish GDP figure for the second quarter. The release only confirmed that GDP continues to accelerate on y/y basis (3.5%). More surprisingly this is not so much the effect of accelerating exports to neighboring Germany, but it is mostly due to domestic demand. This growth driven by domestic demand is unwinding the hands of the hawks. Yesterday, a member of the MPC, Mrs. Anna Zielinska-Glebocka has admitted that the question of the rise of interest rates was discussed at the August meeting. However, any of these positive news did not manage to surpass the power of bears in core markets, which helped the EUR/PLN back above 4.00.
The situation will not improve even today, when the currency pair can play with resistance on the 200 day moving average (4.026).

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