CEE: Recovery Expected Following Last Week's FX Sell-Off

CEE: Recovery after last week's sell-off

This week, we're looking at a lighter calendar. Today we will see the June state budget result in Hungary, which shows the risks of additional bond issuance in the first five months. Wednesday will see the release of labour market data in Romania. On Thursday, June inflation in the rest of the region will be published. In the Czech Republic, we expect a fall from 11.1% to 9.6% year-on-year, slightly below market expectations. In Romania, a further fall from 10.6% to 10.2% YoY is expected. Final inflation numbers will be released on Friday in Poland and current account numbers will also be published in Poland and the Czech Republic.

We saw a significant sell-off in the FX market in the region last week. In our view, the driver was the global story and repricing as local factors remain rather positive. If the global story calms down as indicated by the morning open, we could see fresh gains and a rally in the region this week. Last week's sell-off has eased the steam from overcrowded market positioning in CEE FX, which should facilitate a recovery. We believe that the massive carry will attract buyers again, which should benefit the Hungarian forint the most. We see the next level below 380 EUR/HUF, which should confirm the recovery in FX and attract further inflows. Nevertheless, we're remaining optimistic for the whole region for this week.