CEE Markets React to Negative Global Sentiment, Await US Payroll Data

CEE: Negative global sentiment drivers sell-off in region

This morning, Romanian GDP for the second quarter posted a slight upside revision. June inflation in Hungary showed a drop from 21.5% to 20.1% year-on-year, in line with market expectations. Later today we will see May data from industry, construction and foreign trade in the Czech Republic. The PMIs suggest a further decline in industrial production, which is also the market's expectation. On the political side, the Hungarian parliament will today vote on next year's budget. S&P's rating review of Hungary will also be published after the close of trading today. The agency downgraded the rating in January to BBB- and so we cannot expect any changes this time.

The highlight of today, however, is likely to be Governor Adam Glapinski's press conference following yesterday's decision by the National Bank of Poland to leave rates unchanged. We expect the tone to be more dovish than a month ago. It is possible that Glapinski will prepare the ground for interest rate cuts after the summer. We maintain our view that rate cuts are possible after the holidays, i.e. in September and October.

CEE FX took another hit yesterday coming from the negative sentiment in global markets, which seems to be the main driver of the current sell-off at the moment. The market opening indicates an improvement in sentiment and so we can expect some gains in the region finally. However, the focus today will be on US payroll data, which will likely decide the next direction. At the moment we don't see too much negative news coming from the local story to justify the current FX weakness. Thus, we see an opportunity to unwind the heavy long positioning, especially in PLN and HUF ahead of a later recovery which we believe will come due to still high carry in the region.