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Central European Weekly

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Poland heading for another rate cut?

Mon, Jun 22 2009, 12:28 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

The current account still shows a surplus

Hungary

Both forint and bonds in a wait-and-see mode

Poland

Poland heading for another rate cut?

The Week Ahead

MNB on hold, NBP should cut and CNB? We believe in no change, but the strong CZK could change it

Overview

Czech koruna decouples from the rest of

The koruna is strengthening… Last week, there was only one currency in the world that the koruna couldn’t beat – the Chilean peso. All the other currencies were ‘licked’ by the Czech currency over the last four days, including its regional competitors – the zloty and the forint. What made the koruna suddenly become (almost) the most rapidly appreciating currency in the world?

Our opinion is that among other things, fundamental factors could be responsible for this, i.e., the very favourably developing external balance of the Czech Republic. Although the Czech export-oriented industry is continuing to fall dauntingly, the Czech Republic’s nominal trade balance keeps improving, due to lower oil prices (compared to last year’s extremes) and relatively poor domestic demand. This is also happening because of the “beggar your neighbour” policy, when the depreciation of the koruna against the euro again gave a lift to the shopping tourism from neighbouring countries (Slovakia in particular). The favourably developing trade balance is a necessary but not sufficient precondition for the koruna (or other currencies) to appreciate. As far as the Czech koruna is concerned, another essential fact is that numerous exporters who hedged the exchange rate at stronger levels half a year or nine months ago, and subsequently slipped into a loss when the koruna weakened (with this limiting their further hedging possibilities), have been freeing their hands recently. This is very important, because exporters’ demand for new hedging generates natural demand for the koruna.

How much may the koruna strengthen? While we are optimistic about the Czech currency in the long term, we remain cautious in the short term. Strictly short-term risk factors for the koruna may include another rise in yields abroad and, after all, also the upcoming meeting of the Czech National Bank. We do not believe that the CNB will cut rates again, but if the koruna strengthens, a majority of the CNB Board may easily arrive at the conclusion that the Czech central bank should follow the example of its Polish counterpart (the meeting of the National Bank of Poland is scheduled for Wednesday), and cut official rates by another 25 basis points.

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Published on  Mon, Jun 22 2009, 12:35 GMT