CEE currencies remained under significant pressure as fears of euro break-up has intensified and Moody’s downgraded Hungarian debt. Forint fell more than 1% and bond yields spiked above 9% on Friday. In reaction the Polish zloty fell to 29-month low and the Czech koruna to 18-month low.
For the week ahead the main regional highlight is Hungarian NBH meeting. We expect 50 bps rate hikes in reaction to the current stress on the FX and bond markets. Markets as well as some analysts currently expect even more and 50 bps move could be easily interpreted as disappointing. The reaction of government interpreting the rating downgrade as “financial attack” against the country also does not help much. On the other hand the ongoing negotiations on external help from IMF could help the authorities to calm the situation.
Nevertheless one can hardly imagine longer term relief without the resolution of euro crisis. Although we may see some short covering at the beginning of this week, the fear of euro break-up and second financial crisis in direct neighbourhood of CEE should continue to weigh on the region. Based on post- Lehman experience we know that while Czech economy is more vulnerable via trade channel and Polish via financial exposure, Hungary would suffer significantly via both channels.