On Monday, CE currencies were trading mostly under the impression of EMU debt crisis. The Czech koruna proved its relative stability and posted only modest losses (although in intraday trading the EUR/CZK cross rate tested this year’s high at 24.66 EUR/CZK), whereas the zloty and especially the forint depreciated by 1.4% and 2.2% respectively.
Regarding Polish figures, the statistical office said yesterday that sold industrial output grew by 8.1% y/y in August, i.e. three times more than expected. After the release, the Monetary Policy Council member Zita Gilowska said that the data did not support changes in monetary policy in any direction (let us remind that markets currently bet on a rate cut in 9 months horizon). Nevertheless, Gilowska added that dramatic changes in forex market might justify a rate hike.
Similar issues seem to be discussed in Hungary. Today, the NBH meeting will take place. We highlight the possibility of a surprise rate hike on worsening inflation outlook and deteriorating external environment. The government fiscal consolidation package contains VAT hike and several other tax increases, which deteriorate the inflation outlook, while the Greek tragedy creates a deteriorating external environment for the forint. Long-term forward spreads have been widening, thus higher risk premium looks to be a fundamental issue. We think 50bp rate hike is the most likely with a risk of a bigger 75-100bp move. The forint and long-bonds could benefit from this.
As far as the S&P’s downgrade of Italy is concerned, prospective gains of the US dollar should also weigh on regional currencies. On the other hand, uncertainty going into the Fed meeting (today and tomorrow) might prevent the dollar to fully play its safe haven role.