CEE PMI Numbers Deteriorate, FX Market Sees Record Highs and Weakness in Local Currencies

CEE: PMI numbers to deteriorate

PMI numbers across the region will be released today. We expect a deterioration in sentiment in Poland and the Czech Republic as the eurozone and German numbers indicated earlier. On the other hand, we expect some improvement in Hungary. Later today we will also see the state budget result in the Czech Republic. Given that these numbers disappointed almost everywhere across the region in the first half of the year, they now have more attention and a clear impact on potential additional bond issuance over the rest of the year. However, in the Czech Republic, June showed the first improvement and although July may show a renewed deterioration, the second half should point to an improvement overall.

We saw a wild opening in the FX market yesterday. The Polish zloty pushed its record highs with EUR/PLN touching 4.400. The Czech koruna rushed for gains ahead of Thursday's Czech National Bank (CNB) meeting and almost erased all losses from the past two weeks. This may be due to market expectations of a more hawkish CNB this week or the end-month rebalancing of Czech government bonds within the index, which this month was several times larger than usual. In the first case, we can expect even lower EUR/CZK in the days ahead. On the other hand, if the bond rebalancing was the driver, the koruna should stabilise today.

Our main focus yesterday, however, was probably the Hungarian forint, which weakened again to its lowest level since early July and briefly touched 388 EUR/HUF. We still don't see many reasons on the local side to explain the current HUF weakness. That's why we instead analyse global factors and especially EUR/USD as we mentioned yesterday. That said, while we should be seeing an end to the HUF weakness, we also cannot expect a big reversal unless we see a significant recovery in EUR. These EUR/HUF levels also open the question of where the pain threshold is for the Hungarian central bank, which will not like the current situation. However, for any verbal action, we would probably need to see more weakening above the 390 EUR/HUF level in our view.