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Central European Weekly

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Inflation Continues to Rise

Tue, Jul 22 2008, 12:24 GMT
by KBC Market Research Desk

KBC Bank


Czech Republic

EUR/CZK breaks below the 23.0 level

Hungary

NBH leaves rates on hold and puts risks to both sides around inflation

Poland

The risk of second-round effects still a major obstacle on the road to lower rates…

Slovakia

Inflation Continues to Rise

The Week Ahead

Very thin calendar

Overview

Central European currencies enjoy strong money inflows

Central European currencies are strengthening significantly, with no correction on the horizon yet. The exchange rates of the regional currencies are being driven to recordbreaking levels by foreign investors, for whom those currencies have become a safe harbour at the time of high volatility on leading markets, which are affected by a simultaneous fear of a downswing of the U.S. economy and of increased global inflationary risks. The inflows in CE Fx markets are primarily short-term investments in short-term money market instruments. This applies to the koruna and the zloty in particular. As far as the forint is concerned, at least some foreign investors have picked government bonds as the destination for their investments.

While the strong koruna is a blessing for importers and tourists who travel abroad, the ever stronger Czech currency is increasingly becoming a burden for exporters that reduces their profit margins with some exporters trying to transfer the FX risk onto domestic suppliers. Too rapid an appreciation, as we can see, is not affecting the ‘big’ economic figures yet and is unlikely to show up soon. Hence we can hardly rely on surprisingly worse eco data to trigger a sale of the local currency, the result of which would be the start of a much expected correction of currencies. Concluding, the a further appreciation of those currencies, whose full impact on the economy will make itself felt after some time, still appears to be the risk for the near future.


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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.


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