CEE FX: Negative sentiment weighs on currencies – ING

⦿ Executive Snapshot

• What: Negative sentiment is impacting Central and Eastern European (CEE) currencies amid a rally in the US Dollar.
• Who: ING strategist Frantisek Taborsky and the Hungarian National Bank (NBH).
• Why it matters: The current risk-off sentiment could lead to significant downside risks for CEE currencies, affecting economic stability in the region.

⦿ Key Developments

• The EUR/PLN and EUR/CZK are approaching the upper ends of their recent trading ranges, with EUR/PLN at 4.230-260 and EUR/CZK at 24.250-400.
• A rally in the US Dollar is contributing to building downside risks for CEE currencies, with negative economic impacts expected in the coming months.
• The Hungarian Forint (HUF) is experiencing profit-taking, influenced by a dovish stance from the NBH and the potential for EUR/HUF to break above 365.

⦿ Strategic Context

• CEE currencies have been resilient since the onset of the conflict, but current global risk-off sentiment is shifting the outlook negatively.
• The local economic story in Hungary has been affected post-elections, leading to investor exhaustion and profit-taking within HUF assets.

⦿ Strategic Implications

• Immediate consequences may include increased volatility and potential weakening of CEE currencies if profit-taking accelerates amid a stronger US Dollar.
• Long-term implications could see a shift in market sentiment towards rate cut expectations from the NBH if EUR/HUF surpasses critical levels, complicating FX carry trades.

⦿ Risks & Constraints

• Regulatory and execution risks arise from the potential for a dovish shift in monetary policy by the NBH, which could undermine currency stability.
• Increased competition from stronger currencies like the US Dollar may put further pressure on CEE currencies, limiting their appeal to investors.

⦿ Watchlist / Forward Signals

• Monitor the EUR/HUF exchange rate closely, particularly if it approaches or exceeds 365, which may trigger unwinding of rate cut bets.
• Watch for upcoming economic data releases that may reflect the delayed impacts of the current risk-off sentiment on the CEE economies.