The announcement that Greece may hold a referendum about its euro membership rocked CEE markets. As usual, the Polish and Hungarian currencies suffered the most and the former got close to the end-September record low, while the latter set up a new record for 2011 at 309.90/€. Nevertheless even, the Czech koruna witnessed a visible loss as the EUR/CZK hit the 25.25 level. In this respect it is worth noting that according to the latest CNB inflation projection (which will be revised tomorrow) the koruna should trade below the EUR/CZK 24.0 level. In other words the Czech central bank assumed that the currency would be more than 5% stronger.
On the interest rate front, Hungarian markets were the most sensitive to the declining risk appetite and FRAs rose to 7.00% implying two 50bps rate hike on every second month in the future. Higher short-term rates could lend some support to the currency over the short-term and this would be especially the case if one of the MPC members gives a speech to markets, which it has not been doing so since the new MPC started in April.
As concern Hungary’s fundamentals, PMI sentiment dipped further in October to 48.2 from 50.8, which is signalling a contraction of the economy. This raises the probability of a recession in the coming quarters; which could put Hungary into a very dangerous situation because a recession would lead to an increase in the public debt ratio even if the government meets its 2.5% of GDP deficit target. That may question the sustainability of public finances in Hungary, which could put the currency at risk of an attack.