NOK and CEE: Focus on FX Purchases and Inflation as Economic Sentiments Shift

NOK: Look out for FX purchases today

At 1000CET today, Norges Bank announces its daily FX purchases for the month of August. We had felt in the past that these were contributing to the krone's underperformance. These had been cut back from NOK1.1mn to NOK1mn between June and July. Given oil prices are doing well and that the trade-weighted krone has rallied 4.5% this month, presumably we should not see these purchases cut much further. But the market might take any increase in the FX purchase as a mild krone negative.

 

CEE: Polish inflation one step closer to single-digit territory

After two light weeks and a strong global story, attention returns to the region. Today sees the release of July inflation in Poland and 2Q GDP numbers in the Czech Republic. In Poland, we expect inflation to have fallen again from 11.5% to 10.9% year-on-year, slightly below market expectations. As we move closer to single-digit territory, which may warrant the first rate cut, we think the market will be watching closely to see if we get below 11% today. GDP in the Czech Republic is the first 2Q number in the region and monthly indicators point to a stagnant economy or only modest growth. Tomorrow, PMI numbers will be released across the region and the decline in Germany and the eurozone indicates a drop in sentiment in the region as well. Later tomorrow, budget numbers will be released in the Czech Republic. On Thursday, the Czech National Bank (CNB) will meet. Rates are expected to remain unchanged and the main focus will be on the new forecast and the board's view on the first rate cut and the weak CZK. Then on Friday, industry and retail sales data in Hungary and the Czech Republic for June will be released.

The FX market is dominated by the US dollar, which drove CEE FX to weaker levels last week. It is hard to see new positive momentum in the region stemming from the dollar this week, but a stable EUR/USD would at least be positive news. However, other factors are still playing in CEE's favour. Market sentiment remains positive after the Fed and ECB signalled they are nearing the end of their hiking cycles. Gas prices, key for the forint and the koruna, hit their lowest level in two weeks on Friday after spiking earlier. Locally, rates rebounded and interest rate differentials improved visibly in the Czech Republic and Poland. The Polish zloty hit its strongest levels since September 2020 late last week and today's inflation could determine the direction going forward. The zloty remains the most long currency in the region in our view, however, the best current account picture in CEE and MinFin transactions in the market should prevent any sell-off. Therefore, we see more of a further slide in EUR/PLN to the downside. The Czech koruna returned below 24.00 EUR/CZK on Friday and of course, the Czech National Bank will be a major player this week. We expect hawkish words of support given that FX is an important pillar of monetary policy these days. Therefore, we could see further recovery towards 23.90 EUR/CZK.