Exchange rates stable, dollar counts on Fed, Norwegian krone and forint in trouble (Daily analysis 12.12.2022)

While the forint or the Norwegian krone are depreciating, the zloty remains stable. The main currencies remained virtually unchanged in value over the previous week. The EUR/USD exchange rate lost upward momentum ahead of 1.06, the lows from the market crash after the pandemic outbreak in the first quarter of 2020. The dollar's fate will depend on the outcome of the main central bank meetings, and we recognize a significant risk of a USD rebound. The Fed will raise rates by 50bp on Wednesday evening, and the European Central Bank, the Swiss National Bank and the Bank of England are likely to follow with a similar move on Thursday.

Among the main currencies, the Norwegian krone has been the weakest lately, losing more than 2% against the euro in December. This is mainly due to the continuing decline in Brent crude oil towards 75 USD. Thus, a barrel on the London stock exchange costs the least in almost a year. However, there may be limited scope for a continuation of this trend. Firstly, the OPEC cartel and its allies are actively trying to manage production in order to avoid a permanent oversupply of crude. Secondly, as many as 180 million barrels have been released from strategic oil reserves in the US this year, and depleted stocks must be replenished. Thirdly, the lifting of pandemic restrictions in China should also boost demand for crude.

While the zloty and the Czech koruna remain stable, the forint is again under considerable pressure among CEE3 currencies. The HUF, like the PLN, made up for its losses in the fourth quarter. From mid-October to mid-November, it gained more than 8% in relation to the euro, and the EUR/HUF retreated to its March highs when the region's currencies were overvalued following Russia's attack on Ukraine. However, more than half of this appreciation has already been erased, and the forint to zloty has lost more than 3% in the past month. Investors are (rightly) concerned about the macroeconomic stability of the Hungarian economy, where inflation is out of control despite the highest interest rates in the region (13%). Already in November, inflation exceeded 22% year-on-year, and in December, after the release of fuel prices and their massive jump, price dynamics will inevitably make another strong leap. The case of Hungary illustrates vividly how disadvantageous it is for the currency and local debt when price pressures are extinguished all around, but not in the country in question.

In the coming days, markets' attention will focus on a series of decisions by the main central banks. On Wednesday, the Federal Reserve will raise rates by half a percentage point and to a range of 4.25-4.50%. Such a move is well-digested by the markets. However, we expect forecasts from FOMC members to indicate that the target level for the cost of money is higher than the current market valuation assuming a total of less than three 25 basis point hikes in February, March and May. This is likely to provide an impetus for improving the dollar's condition. For the time being, the EUR/USD rally has slowed slightly above 1.05. On Thursday, a move of identical magnitude to that of the US monetary authorities is likely to be repeated by the European Central Bank, the Swiss National Bank and the Bank of England. However, we see a strong probability that, once again, it will be the Fed that will prove to be the central bank communicating the determination to fight inflation the hardest, which is, of course, due to the strength of the US economy.