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US June non-farm payrolls data helped spur a risk rally after jobs increased by a forecast beating 4.8mn. Coupled with a round of strong manufacturing PMIs in June across the globe, this has helped support the bullish view that the global economic rebound from the Covid-19 pandemic can be V-shaped (see below for the JPM Global Manuf PMI) and spurred the biggest weekly gain in emerging-market stocks (MSCI EM Index) in a month.

However, there are many questions and uncertainties around the durability of the recovery. The start of Q3 has already brought with it a pause of re-openings for many US states and in some a fresh raft of restrictions, which will likely mean the data could again lose momentum.

This means that the global economic recovery is unlikely to be a smooth linear process, rather a bumpy path as companies, households and governments look to strike a balance between economic activity and public health. The Fed's Barkin summed it up when he likened it to riding the elevator down, but needing to take the stairs back up.

As mentioned above, this pace of recovery is unlikely to be sustained and there is still a long way to go for economies to recover what was lost in the Mach-April carnage. A complete rebound in GDP to pre-crisis levels looks very unlikely in 2021 and will take until the virus is controlled.


IGM FX and Rates 

IGM FX and Rates

Focus on CEE Region - A gradual recovery underway

The CEE region has not escaped the pandemic, but compared to Western Europe saw relatively limited outbreaks and lower death tolls (see below for latest data as of 5th July):

  • Czech Rep - 12,515 Cases, 349 deaths
  • Hungary - 4,189 Cases, 589 deaths
  • Poland - 35,959 Cases, 1,517 deaths


The CEE governments all introduced early lockdowns to limit their outbreaks, but of course like the rest of the world this has led to a severe economic contraction. The CEE region was also hit by the demand fallout from the Eurozone and large capital outflows. The EPFR country flows data shows investors withdrew USD2.27bn from funds investing in these countries from the end of February (see dashboard below).

The Czech economy is set to see the most negative growth in the region this year (-8.0% vs +2.3% pre-crisis), whilst the Hungarian economy is expected to contract 7.0% in 2020 (vs growth of 3.2% pre-pandemic, according to the EC). Note the NBH still has a wildly unrealistic forecast that Hungary can achieve growth this year of 0.3-2.0%. As the dashboard shows, both the Czech Rep and Hungary have seen the biggest downgrades of GDP growth forecasts for 2020, which partly reflects the mix of the large openness of these two CEE economies, as well as their exposure to the cyclical auto industry. The Czech Rep headed into the lockdown in a weaker position, with a Q1 GDP contraction of 2.0% y/y, vs growth of 2.2% and 2.0% in Hungary and Poland, which suggests the Q2 contraction will not be as severe as in Poland and Hungary.

The manufacturing PMIs (see dashboard below) are an early indicator that CEE economies are through the worst and a gradual recovery lies ahead, but were not yet in expansion territory during June. The rebounds forecast for 2021 are expected to be strongest in the Czech Rep and Hungary (vs extent of contraction in 2020).

IGM FX and Rates


Below we summarise the monetary and fiscal responses to the Covid-19 pandemic and what this means for debt levels (see dashboard):

Czech Rep

  • CNB cut by 200bp, the largest conventional monetary easing, now unlikely to do anything else as deflation unlikely.
  • Czech government has amended the budget to increase the deficit this year by CZK200bn to CZK500bn, which includes CZK136bn of new spending. For now only around half of this expenditure has been allocated for specific purposes. According to EC forecast this will push gross public debt up to 38.7%/GDP from 30.8%/GDP (see dashboard).


  • NBH initially pushed rates higher to stabilise the HUF, but has since reverted to easing policy by cutting rates, although scope seen limited and for now the QE programme has been paused.
  • The Hungarian government has put in place Covid-19 pandemic stimulus measures but most of this is being financed from restructuring the budget rather than additional spending. This the fiscal impulse is seen near zero. However, due to lower revenues from the slowdown the Hungarian government is expected to push gross debt levels up to 75%/GDP from 66.3%/GDP. Hungary entered this crisis with already high debt levels and thus has less fiscal room to react.


  • The NBP has delivered one of the largest QE programmes and this is expected to continue into 2021 as the NBP has been buying the bond issues from the state bank BGK and state development fund PFR into next year. The MPC is unwilling to cut rates into negative territory, so the rate easing cycle was completed in May.
  • The Polish government has committed PLN66bn of new public spending and expects the deficit to widen to 8.5%/GDP, which according to EC forecasts will push gross public debt to 58.5%/GDP in 2020 from 46%/GDP in 2019. However, the government is splitting debt issuance between state bank BGK and state development fund PFR, which fall outside the local definition of the deficit and debt. Note the constitutional limit of public debt is 60%/GDP (local caclulation) or 55%/GDP (EC calculation).


Long CZK/PLN favoured

Looking at the predicted strength of the economic rebound, the policy mix, the external balances and debt levels, we believe the CZK should outperform in the coming months, whilst the PLN will underperform,

  • Czech debt levels should remain below 40%/GDP and the central bank is unlikely to start unconventional monetary easing measures that would would weigh on the CZK.
  • The HUF saw a slump after the NBH's surprise rate cut, but due to expectations of limited easing from here, the expected C/A surplus and the HUF's strong real rate, this is seen as a one-off move and HUF is unlikely to slide much further.
  • The PLN is seen being held back by the NBP's loose policy stance (large scale QE to be extended into 2021), a low real rate and concerns over how the government has shifted the Covid-19 stimulus funding off its balance sheet. On top of this, the NBP have shown over the last month that they are concerned by the PLN's appreciation and may continue verbal interventions.


Thus, we see scope for CZK/PLN to move higher after remaining fairly steady over the past month. The upside has been capped around 0.168 during this period, but our charts suggest that a sustained break of 0.1686 (4/5 May highs) would re-open 0.1703 (14 April reaction high) and potentially the 2020 peak at 0.1721 (24 February).

IGM FX and Rates

  • Advanced from 0.1629 (27/28 May reaction lows) to probe the top of a four-month symmetrical triangle and the 200DMA
  • With studies building, a sustained break of 0.1686 (4/5 May highs) would re-open 0.1703 (14 April reaction high) and potentially the 2020 peak at 0.1721 (24 February)
  • Only a failure to sustain the symmetrical triangle break would caution, but 0.1654 (16 June minor higher low) should limit corrective dips

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