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Criticism of the Hungarian Convergence Programme; the Polish central bank is expected to hike rates

Criticism of the Hungarian Convergence Programme; the Polish central bank is expected to hike rates

8.6.2011 10:35

 - EC pessimistic about Hungarian Convergence Programme
 - NBP set to hike rates

The Czech crown strengthened slightly and was trading around EUR/CZK 24.20 for most of the session – one month highs. The Czech currency clearly continues to profit from weakening US dollar. Ongoing government crisis has no impact on the crisis and we continue to believe that smallest rather populist party VV should continue to support the cabinet as it would hardly survive early elections.
The expected decline in May unemployment should came out with stronger than expected growth in real wages, although still pretty low (0.4% y/y). Today, the interest rate hike in Poland should not have major impact on the koruna. We believe that more interesting from Czech point of view should be the ECB meeting scheduled for Thursday. Hawkish tone could somewhat stabilize the recent run of the Czech koruna towards stronger levels.
The Czech bond markets awaits 5.7%/2024 auction today. Although the demand should not be probably as high as in case of Czech floaters, we believe current global bond-favorable environment should ensure solid outcome.

The Hungarian forint continued to hover in a narrow range between 265.00-266.50, despite the European Commission’s critical comments about Hungary’s Convergence Programme. The Commission sees the 2012 deficit at 3.3% of GDP vs the government’s 2.5% of GDP target and urges for additional austerity measures to secure the deficit below 3% of GDP. It said that employment of women is particularly low in Hungary and welcomed the lower tax on labour income as an incentive to improve this. It also saw risks for the period after 2013 as the program targets a deficit of 1.5% of GDP in 2013, but there are no details how this would be achieved. Overall, markets may not react much to this as the above 3% of GDP deficit forecast from the EC has already been known and the risk of implementation is also priced in by markets with the 5y5y forward spread ranging around 280-290bps.

The Polish zloty posted modest gains on the eve of the Monetary Policy Council (MPC) rate decision, which is scheduled for this afternoon. The EUR/PLN currency pair dipped even below 3.94 EUR/PLN in intraday trading, i.e. to the lowest levels in last two weeks.
Today, markets will undoubtedly focus on this week’s eye-catcher, which is the above mentioned announcement of the MPC rate decision. This time, the MPC meeting is accompanied by the discussion on a new inflation report, which will take into account surprisingly high rate of inflation. As we said earlier, we think that another 25 bps rate hike hangs in the air. Such a decision should, at least in a short-term, play in favor of the Polish currency.

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