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Central European Weekly

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Forint hovers around 10−year highs

Mon, Jul 28 2008, 11:02 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

CNB Governor threatened the market with a rate cut! It’s all about the koruna now

Hungary

Forint hovers around 10-year highs

Poland

Will the MPC try to reverse the most recent strengthening leg of the zloty? We say - no.

Slovakia

The Slovak currency saw major fluctuations against CZK

The Week Ahead

NBP to leave rates on hold, while the strong zloty might bring a bit softer stance of the MPC

Overview

The Czech koruna weakens on CNB’s verbal intervention

Rarely did anyone succeed in timing a verbal intervention to weaken a local currency so well as did Czech National Bank Governor Tůma, on Tuesday. The move against the koruna, stemming from the warning that the CNB Board might cut interest rates at its forthcoming meeting, was optimally timed, not only because nobody had anticipated an intervention of this sort, but also because there were optimal global conditions for the intervention. When Governor Tůma threatened a rate cut, the US dollar was strengthening rapidly, while oil prices were falling. In other words, this was the combination of factors that, in the opposite direction, had provided foreign investors a reason to open long positions in the koruna. This is also why Tůma could succeed in making the Czech currency weaken by 3%, and this stirred up forex markets throughout Central Europe.

Thus the CNB made it clear that it did not like the koruna to be too strong and that it is ready to intervene if necessary. Hence the market started to take the rate cut threat seriously. Nevertheless, we still prefer scenario of stable rates for now even if the rate cut threat will continue to be on the agenda (e.g., on a narrow vote by the CNB Board). In any case, if the EUR/CZK currency pair slips to EUR/CZK 23.0, or even below that, before the CNB meeting – a cut in the Czech National Bank’s repo rate will be more than probable.

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Published on  Mon, Aug 4 2008, 06:21 GMT