The National Bank of Hungary cut its key interest rate by 25bp to 7.00% yesterday, in line with expectations. The focus of the communication is the new forward guidance. While the previous one highlighted the possibility of “further reduction in the base rate in a cautious and data-driven manner”, the new one clearly states that the Monetary Council “will take decisions on the level of the base rate in a cautious and data-driven manner”. In practice, the NBH now focuses on the level rather than the delta. However, our forecast remains unchanged – no rate cuts in the second half of the year.
The forint responded by strengthening but we have seen this elsewhere in the region and throughout the EM universe. Given the rally in core rates, even HUF rates were heading lower and the hawkish NBH report did not make much of a splash here. However, we think the hawkish NBH may unlock a short-term rally in the forint along with the return of risk-on sentiment even though we are still rather negative on HUF in the medium term. Today’s market open will be key, but for now, it looks like we could go back to 392 EUR/HUF.
In the CEE region, today’s calendar is empty. However, the markets have plenty of reasons for action. The last two days have confirmed the turn in global sentiment in favour of EM currencies and CEE is benefiting significantly. As we expected, Poland’s zloty has rallied the most among its peers so far and we think this will be the story for the days ahead. Positioning is much more balanced after erasing all of this year’s gains while rates point to levels around 4.300-310. On the other hand, the Czech koruna is being pulled down by new bets for more than a 25bp rate cut next week. EUR/CZK moved above 24.800 yesterday and further comments from CNB could push FX towards 24.900 in our view. We think PLN/CZK thus has good potential to return to 5.800.
Frantisek Taborsky
