Central European currencies continued to decouple as the Czech koruna extended is losses, while the forint and the zloty were able to their positions. In our view the underperformance of the Czech currency can be explained by firming expectations that the Czech National bank will bring more easing next week. This might include a 25 bps rate cut and very dovish comments describing worsening outlook of the economy. On the other hand, there will be no cuts in Hungary and Poland (at least in the short-run). Moreover, there are positive news coming form Hungary, which are related to ongoing talks between the Hungarian government and the IMF and the EU respectively.
Nevertheless, should recent negative global risky markets intensify we believe that the forint and the zloty join koruna’s bearish behaviour, or in other words the correlation between the Czech currency and its regional PEER will again move higher.