CEE: Navigating Currency Volatility Amidst Regional Factors

CEE: FX looking for hard ground

The calendar in the region is basically empty today but it seems that financial markets can find their own entertainment without it. CEE assets continue in higher volatility mode. After Tuesday's sell-off, Local currencies found some ground yesterday. From our perspective, we continue to see the Czech koruna as the most stable in this risk-off environment. Positioning was already short before the sell-off and the CZK seems to be firmly anchored to rates, which are not going anywhere for now thanks to the CNB's cautious approach. Therefore, we continue to see the 24.700-800 range as an anchor for EUR/CZK.

Poland's zloty remains the only currency supported by higher market rates, improving the interest rate differential. On the other hand, market positioning here supports more selling pressure. Moreover, the political situation has only temporarily calmed down, in our view, and we are likely to see more noise in the near term. Therefore, we expect to see 4.400 EUR/PLN levels again soon -  rather next week than this.

However, the key now will be mainly EUR/HUF, which is moving up fast ahead of next week's National Bank of Hungary meeting. We expect a 100bp cut on Tuesday but a still-weak forint is the risk to our call. We see 390 as a pain threshold where NBH will start to be more cautious and 395 as a hard stop for a 100bp rate cut and switch to the previous 75bp pace. We turned negative on HUF before the start of this sell-off due to FX and rate divergence, discussed here earlier. But now we believe this gap has closed in the last few days and the pressure on HUF should stop. However, the risk-off sentiment and long positioning is a clear risk here, which may further threaten the forint.