Czech Republic
EUR/CZK almost tested the 26 level as CNB threatens with interventions
Hungary
While foreign trade is in huge surplus, government bond auctions are very bid
Poland
Zloty weakens as it faces contagion from Romania and Latvia
The Week Ahead
Hungarian and Polish inflation figures in the spotlight
Overview
CNB on its was to ‘quantitative easing’
The Czech National Bank has started to prepare its ‘artillery’ ahead of the November meeting of the CNB Board, when a new inflation forecast will be discussed. The aggressively dovish statements made by two important members of the Board, spiced up by verbal interventions against the koruna, and other (anti-inflationary) arguments, have made us change our outlook for CNB rates and the Czech koruna.
Thus we expect the CNB Board to cut its repo rate, by 25 basis points (to 1.0%), in early November. Nonetheless, even this might still not be the CNB Board’s last policy move. The Board may also consider other options that might lead to an easing of monetary conditions in the Czech Republic – and they may not necessarily be limited to an explicit go-ahead for forex interventions against the koruna. The CNB might decide to purchase government bonds on the secondary market, in order to cut market interest rates (i.e., to reduce the relevant risk premiums). Naturally, all of this will boost Czech bonds, which are likely to see several very strong sessions.
On the other hand, the koruna is unlikely to respond positively to the switch to the Czech variant of Quantitative Easing. Bear in mind that interventions against the koruna are clearly the most likely instrument that the Czech National Bank might use in its Quantitative Easing policy.
What is the level where the CNB may intervene against the koruna? For the next few months, we see the ‘CNB’s pain threshold’ at around the EUR/CZK 25.0 level – below this, a forex intervention may be imminent.
