BUDAPEST: The crown eased versus the euro on Thursday as expectations for hawkish comments from the Czech central bank (CNB) were outweighed by indications from the US Federal Reserve of a continued rise in its interest rates.
Investors in Central Europe have been closely watching the euro/dollar cross in the past weeks, which hovered around the 1.2 line on Thursday.
A flow of funds into the greenback knocked the region’s currencies to multi-month lows by Tuesday, and they traded near those levels after Wednesday’s Fed meeting.
The crown slightly outperformed regional peers on Wednesday as its recent weakness is expected to prompt hawkish comments from the CNB’s meeting on Thursday.
The currency eased 0.2 percent to 25.615 against the euro by 0832 GMT, while the zloty shed 0.1 percent in slow international trade as Warsaw markets were closed for holiday. The forint and the leu were steady.
Czech rate setters have said repeatedly that they would need less rise in interest rates if the crown strengthens. The bank’s forecasts included crown levels firmer than 25 for this quarter.
The bank is expected to keep its two-week repo rate on hold at 0.75 percent, but could signal further rate hikes to come this year, market participants said.
Only one out of 14 analysts in a Reuters poll projected a hike for Thursday’s meeting. Eight analysts saw the bank’s next rate hike coming in the third quarter, including five that put it to the Aug. 2 meeting.
Higher interest rates could strengthen the crown and that makes long-term Czech government bonds attractive, Raiffeisen analyst Stephan Imre said in a note.
“We expect the CNB to deliver a more hawkish message at the press conference to be held following today’s CNB board meeting. More currency driven local bond market gains would be logical consequence of this,” he added.
The yield on Czech 10-year government bonds dropped 2 basis points to 1.73 percent, while Hungary’s corresponding paper traded at 2.61 percent, 6 basis points above Wednesday’s fixing.
Romania’s 10-year yield was bid at 4.62 percent, up by 1 basis point.
There is scope for the Romanian central bank to acquiesce to the consensus view of a policy rate hike at its meeting on May 7, Erste Group’s chief economist in Romania, Horia Braun-Erdei said in a note.
With the dollar’s strength looking like it could last and a Fed rate hike in June almost certain, assets in emerging markets including Central Europe may face further selling, he said.
“We could be looking ahead at a more prolonged bear market for this asset class,” he added.
Source: Brecorder
