Central European currencies are once again under pressure. Weaker US payrolls and spike in global risk aversion strengthened, while the strong Swiss frank subsequently weighed on the whole region too. The biggest looser seems to be once again the Hungarian forint. It is not a big surprise as our sensitivity analysis shows Hungarian economy to be most vulnerable to potential recession in the euro-zone and has most serious problem with mortgages denominated in foreign currencies.
On the other hand the Czech koruna weakened quite significantly as well. Partly technical factors could have played a role – the EUR/CZK pair failed to break below 24.00 EUR/CZK for several times. Beside that weaker retail sales certainly did not help and remind investors that the Czech economy cannot rely on domestic demand right now. This can be also seen in weak real wage growth (0.7% y/y in Q2), released this morning.
Furthermore the Czech Parliament passed further austerity measures that may weigh on the domestic demand next year. A lower rate for VAT tax should rise from 10% to 14% next year and starting from 2013 there should be single the tax rate at 17.5%. The initial impact on consumer prices should be slightly below 1 percentage point. Beside that the subsidies on the maternity leave should be cut quite significantly. Putting it all together the Czech economy can be pretty vulnerable in case of global slowdown as it relies on exports even more than normally now. From the CNB policy point of view it is the strong argument for keeping the current extra-loose monetary policy unchanged, which is not a good signal for the koruna in short term. In longer run perspective fiscal austerity is, of course, rather a positive factor.