June 11, 2019 / 9:37 AM / 2 months ago

CEE MARKETS-CPI rise fails to boost Czech crown as dollar consolidates

    * Czech CPI rises, CNB chief says hike is optimal next move
    * Czech markets remain split over interest rate outlook
    * CEE currencies retreat as dollar decline does not continue

    By Sandor Peto
    BUDAPEST, June 11 (Reuters) - A surprise rise in Czech
inflation failed to strengthen the crown on Tuesday as Central
European currencies take a pause this week after a rally caused
by a global selling of the dollar.
    The dollar's rally last year often caused selling in the
region's currencies. They have been helped in recent weeks by
the greenback's weakness amid strengthening expectations for
Federal Reserve interest rate cuts.
    While inflation has been moderate in developed economies, it
has been increased by a surge in wages in the European Union's
fast-growing emerging markets.
    The correlation of the Czech crown's euro cross
with the dollar's index versus a basket of currencies is
the strongest since October.
    In the case of the forint, the correlation is the
strongest in a year.    
    With the dollar consolidating after the past weeks' losses,
the crown and the forint eased 0.2 percent, to 25.658 and
320.55, respectively, while the zloty and the leu
 shed 0.1 percent.
    The rally brought the region's currencies to multi-week
highs at or near technical resistance levels in recent days.
    The forint could only briefly pierce the 320 level, the
crown got near 9-month highs, the zloty near 10-month highs, and
the leu set a 5-month high.   
    Czech annual inflation picked up to 2.9 percent in May,
above analysts' 2.7 percent forecast.
    It would be optimal if the current pause in monetary policy
changes is followed by more interest rate growth as rates are
still not at normal levels, Czech central bank (CNB) Governor
Jiri Rusnok said.
    That is a change compared to comments suggesting neutrality
after the CNB's latest interest rate hike in early May.
    The comments still failed to boost the crown as the dollar
firmed slightly, and analysts and dealers remained split over
interest rate prospects.
    "May inflation confirmed our expectations that the central
banks will hike rates one more time this year, probably in the
second half of the year," said Jana Steckerova, economist at
Komercni Banka.
    "(However) the market still does not believe the central
bank will hike rates again," she added.
    Erste analyst Jiri Polansky said in a note that inflation,
mainly boosted by a rise in food prices including a surge in the
cost of potatoes, could slow down in the coming months. 
    "However, a return of koruna on the appreciation trend and
another CNB hike, which we expect to occur approx. in the mid of
2020, should return headline inflation towards the target during
the year," he said.
            CEE       SNAPSHOT   AT                         
            MARKETS             1055 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2019
 Czech      <EURCZK=   25.6580   25.6200    -0.15%    +0.19%
 crown      >                                       
 Hungary    <EURHUF=  320.5500  320.0500    -0.16%    +0.17%
 forint     >                                       
 Polish     <EURPLN=    4.2677    4.2630    -0.11%    +0.51%
 zloty      >                                       
 Romanian   <EURRON=    4.7230    4.7190    -0.08%    -1.46%
 leu        >                                       
 Croatian   <EURHRK=    7.4110    7.4155    +0.06%    -0.01%
 kuna       >                                       
 Serbian    <EURRSD=  117.8700  117.9500    +0.07%    +0.36%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2019
 Prague                1063.92  1059.220    +0.44%    +7.84%
 Budapest             41397.26  41159.57    +0.58%    +5.77%
 Warsaw                2281.12   2282.51    -0.06%    +0.20%
 Bucharest             8626.75   8583.26    +0.51%   +16.84%
 Ljubljana  <.SBITOP    866.90    879.66    -1.45%    +7.79%
 Zagreb                1896.01   1889.07    +0.37%    +8.42%
 Belgrade   <.BELEX1    732.99    731.88    +0.15%    -3.77%
 Sofia                  581.63    581.37    +0.04%    -2.16%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.6060    0.0060   +226bps     +1bps
   5-year   <CZ5YT=R    1.5130    0.0020   +210bps     -2bps
   10-year  <CZ10YT=    1.6990    0.0470   +192bps     +2bps
   2-year   <PL2YT=R    1.6620    0.0100   +232bps     +1bps
   5-year   <PL5YT=R    2.0430    0.0870   +263bps     +7bps
   10-year  <PL10YT=    2.5380    0.0610   +276bps     +3bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.15      2.07      1.97      2.18
 Hungary                  0.29      0.40      0.53      0.18
 Poland                   1.74      1.73      1.73      1.72
 Note: FRA  are for ask prices                              
 (Additional reporting by Jason Hovet in Prague, editing by Ed
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