The CNB did not surprise with its decision and, as expected, decided to keep rates stable for the seventh time in a row. However, what was surprising was the ratio of votes, with three bank board members raising their hand for a 25bp hike. |
FX markets have moved closer to a commonly shared scenario and in the absence of additional volatility shocks, exchange rates have stabilized after a dynamic first quarter. On global markets, this scenario mirrors central banks which are closing in on their terminal rate levels, rate cuts though not imminent, core inflation stabilizing, and economic momentum speaking for a soft rather than hard landing. For EUR/USD this implies sideways at 1.10. In CEE the appreciation of CE-3 came to a halt with the Polish złoty catching up to its peers at the very last minute. The Czech koruna had to shed some feathers after sentiment grew overly optimistic. With CNB and Fed meetings today and ECB tomorrow, FX markets are on the lookout for impulses which can challenge the current status quo. This issues features:
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Banks failing, regulators holding emergency meetings over weekends, coordinated actions across major central banks, risk-free yields and bank stocks in free fall, this brings up memories. While we think that this time is indeed different, elevated volatility is here to stay as the higher rates environment may require more adjustments down the road. For the euro this implies large swings but as long as a persistent loss in confidence in the banking sector can be avoided the euro should hold its ground. Capitalizing on its safe-haven status proved not only to be difficult for the US dollar but even more so for the Swiss franc. In the FX markets of Central Europe, it was mainly the Czech koruna and the Hungarian forint, which came under pressure, in this adverse market environment, while the Polish zloty was stable. The former, however, already traded at rather strong levels compared to their fundamentals before. This issues features:
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At the beginning of 1993, the political map expanded and after a peaceful division, Czechoslovakia was replaced by the independent countries of the Czech Republic and Slovakia. Developments over the last 30 years have often diverged and while the Czech Republic has taken a more proactive approach to integration from the start, Slovakia has managed to push integration further by joining the euro area. After 30 years, the two countries maintain a strong relationship and face new - often similar, often quite different - challenges. |
As the negative terms-of-trade shock is fading on forward-looking foreign exchange markets, it's back to the usual suspects: inflation, central banks and interest rates. Recent weeks have been characterized by an inflation re-awakening, which triggered a substantial hawkish re-pricing of global central banks. In spite of interest rates moving more or less in tandem on both sides of the Atlantic, the market environment was US dollar positive. In Central Europe this, however, did not prove to be a substantial headwind until now as exchange rates stabilized around rather strong levels. We are cautious that current valuations can endure over the medium-term not least due to narrowing interest rate differentials between the ECB and CE-3 central banks. In Eastern Europe the strong depreciation of the Russian and Belarusian rouble over recent months might have come to a halt and limits the depreciation potential for the rest of the year. In Ukraine, the hryvnia became more balanced and we upgraded our forecasts in response. Also in Serbia the commitment to a stable exchange rate remains strong. This issues features:
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