The Turkish situation to some extent abated last week

FX and bond market stable in CEE

On global markets:

The most important releases this week will be the flash estimate of inflation for the Eurozone in August and July PCE inflation for the US. Due to the slightly declining dynamics of energy prices, we expect a minor drop in headline inflation in the Eurozone to roughly 2.0% y/y from July’s 2.1% y/y. However, for the EURUSD these are, in the current environment, second-tier data, so the pair is more likely to be affected by political events.

CEE currencies:

The Turkish situation to some extent abated last week, and therefore its influence on regional markets also decreased. Among CEE currencies, the Polish zloty and the Romanian leu performed the best the last week, while the forint and the Czech koruna fell to some extent. As for the zloty, the reason for such performance could be underpinned by the fact that retail sales and construction figures came in at rather strong levels for July (which prompted from us an upside revision of the GDP forecast to 4.9% for this year), while the budget deficit is also seen as below initial plans by Polish authorities for this year. The relative weakness of the koruna and the forint could also be underpinned by US President Donald Trump’s comments that he would like to impose the 25% tariffs on cars imported from the EU that he had flagged earlier. The Czech and Hungarian economies might be viewed as vulnerable by investors in such a case, albeit research published earlier this summer by Ceska Sporitelna shows that a 10% increase in tariffs on products shipped to the United States would chop off roughly 0.2-0.3pp from annual real GDP growth in the Czech Republic. The extent (given the similar share of exports as a percent of GDP and a similar composition) would not be much different for Slovakia and Hungary. This means that such an increase in tariffs by the US, although negative, would not be unmanageable for these countries.

CEE rates and yields:

CEE10Y yields mostly remained flat or declined last week. The strongest decline was seen in Hungary, where the 10Y yield fell by roughly 10bp last week. The Hungarian central bank delivered no surprises at its monetary meeting last week, keeping rates unchanged and reiterating that they see loose monetary conditions as required in order for inflation to reach the 3% goal in a sustainable manner. After some increase in previous weeks, shortterm rates also started to somewhat decline in Hungary. In contrast, in the Czech Republic, short-term rates continued to increase last week. As the Czech koruna remains relatively weak, it is becoming increasingly likely that another hike will come at around the end of September. The CNB seems to be looking at koruna development very closely and, therefore, if the koruna does not show appreciation later this year, then an additional hike by the end of the year would also not be surprising. The 3X6 FRA increased to above 1.8% last week, while the policy (repo) rate is at 1.25% at the moment.

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