Czech Republic

Czech industry continues to fall at a double-digit rate


Hungary

New PM announcement about the fresh austerity package


Poland

Poland asks IMF for new flexible credit line (FCL)


The Week Ahead

MNB expected to stay on hold at 9.50%, despite VAT hike and implied inflation outlook


Overview

IMF’s back up of Poland opens door for carry trade in CE

Poland after Hungary, Latvia, and Romania, has become the fourth Eastern European country of what are known as the new EU Member States to be supported by the IMF. We should add, however, that Poland, unlike the other countries mentioned above, has applied for the IMF’s new flexible credit line voluntarily. Contrary to the usual IMF practice, the loan of $20bn from the IMF can be drawn on without having to meet specific macroeconomic conditions, and will be used by Poland (as well as, for example, by Mexico) as a buffer, should the zloty again come under speculative pressure.

Markets welcomed the decision by the Polish government, and the zloty strengthened a little. The risk premium on Polish debt decreased slightly. Nevertheless, the Polish government’s move was used as the reason for the launch of other trades – what are known as carry trades, based on the PLN/CZK currency pair. Carry trades in Central Europe (which also benefit the forint) have again become popular, now that global risk aversion has significantly decreased and speculating entities have come to the conclusion that, this strategy may be successful, at least for some time. The Czech koruna has partly become the currency to finance carry trade positions in the rest of Central Europe, notably in Poland. What will be the market consequences?

In addition to the depreciation against the zloty (and partly also against the forint), the strong relationship between the koruna and regional fluctuations at the start of the year is likely to loosen. The Czech currency, unlike the Polish or Hungarian ones, may (for at least some time) stop behaving as a purely emerging market currency and, just like in 2007, be more dependent on low-interest currencies – i.e., to relatively weaken when the appetite for risk increases, and vice versa.