CEE region

The US dollar is still battling December seasonality, which is leading it to weaker levels. However, the market will mainly focus on next week rather than going in one direction. The European Commission may release a new assessment of Hungary USD: Still fighting seasonal trends Global risk sentiment recovered yesterday after a few grim sessions for global equities, and the dollar faced some broad-based depreciation. As highlighted in our recent FX commentaries, the dollar tends to be seasonally weak in December, so this is a month of damage limitation for dollar bulls like ourselves. Price action in G10 currencies has been quite mixed, with the best performers being AUD, CHF and CAD yesterday. Among the pro-cyclical currencies, we continue to think that CAD has a better chance of outperforming next year thanks to limited exposure to China and Europe’s economic woes while being positively correlated to a rise in energy prices, which is our commodity team’s baseline scenario. The US calendar includes PPI and University of Michigan survey numbers today. With markets being focused on various gauges of inflation, expect dollar sensitivity to these data releases. The dollar could stabilise around current levels as markets gear up for the last week of action (Fed, ECB and BoE meetings) of 2022. DXY may stay around 104.50/105.00 today. Francesco Pesole EUR: Rally above 1.06 would be premature Markets are pricing in around 55bp of tightening ahead of the ECB meeting next week, and with no more speakers before the rate announcement and no key data releases except for the ZEW surveys on Tuesday, we doubt that rate expectations will move much in the coming days. Our base case is still that EUR/USD will struggle to trade sustainably above 1.0600, and is mostly facing downside risks into year-end as the dollar could regain some ground on global risk uncertainty and rebounding energy prices. Francesco Pesole GBP: Keeping an eye on key technical levels The only release to highlight in the UK calendar today is the Bank of England’s inflation attitude survey. Still, markets appear to have cemented their expectations around a 50bp rate hike by the BoE next week, and this may not change drastically before the policy announcement. GBP/USD could hover around 1.22 today, but risks are tilted to the 1.2126 200-day Moving Average being tested soon, in our view. EUR/GBP is trading around the 0.8630 100-day MA, and while we have less of a clear directional call on this pair in the short term, we see upside risks in the longer run. Francesco Pesole CEE: European commission may issue new assessment on Hungary Another tough week in the CEE region is behind us, but Friday has a lot to offer. Apart from the global story, we will be watching the market reaction to yesterday's National Bank of Poland press conference, which was not as dovish as expected. Governor Glapinsky said that the end of the hiking cycle has not yet been decided. On the other hand, he also mentioned falling inflation and a return to single digits numbers. That said, we believe the cycle has been closed and we do expect higher inflation than the central bank. Today the economic calendar is thin in the region, but we may hear more headlines from the European Commission regarding Hungary. An updated European Commission assessment could be released today, which should take into account the newly passed laws on the Hungarian side and thus be more in line with EU requirements. This follows the Commission's follow-up to Tuesday's Ecofin meeting and the member countries that made the request. The outcome of the assessment should be positive for Hungary and for the markets, but there've been plenty of surprises so far in this story.  Frantisek Taborsky Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

A heavy event risk calendar this week stands to define the core themes for 2023. First and foremost is the question of how quickly US inflation decelerates (CPI on Tuesday) and how the Fed will respond (FOMC Wednesday.) A whole host of central bank meetings around the world, including the ECB on Thursday, will provide insights on how long policy stays tight USD: How long does policy need to stay tight? A pivotal week for FX and global asset markets lies ahead of us. The week will play a major role in determining whether central banks (particularly the Federal Reserve) need to keep policy tighter for longer, or can (as the market prices) start to relax a little over inflation and can consider rate cuts in the second half of next year to ensure a soft landing. The two key event risks here are tomorrow's US November CPI reading and Wednesday's FOMC meeting - including the release of a fresh set of dot plots. Going into these event risks the market is pricing the Fed tightening cycle peaking in the 4.90/5.00% area next spring and then 50bp of rate cuts being delivered in the second half. And consensus is for another relatively soft 0.3% month-on-month core CPI release tomorrow, which would tend to support the market's pricing. We look at a range of Fed scenarios in our FOMC preview. As noted previously here, December is typically a soft month for the dollar and probably a more dovish set out of outcomes and a weaker dollar does the most damage to positioning, which is probably still long dollars. However, we do feel that market consensus still underappreciates the risk of inflation staying higher longer and also is dangerously second-guessing the Fed in terms of 2H23 rate cuts. The Fed has said that it feels there is good forward guidance value in its dot plots and it may choose to get across its current message of tight policy staying in place for longer through those dot plots. Our rates team also sees upside risks to US 10-year yields from the 3.50% area, with outside risk to the Fed discussing outright US Treasury sales (rather than just roll-offs) if it does think the long end of the curve is too stimulative. Notably, the correlation between US 10-year yields and G10 dollar crosses has picked up substantially since the soft October CPI release on 10 November. The long end of the curve is therefore going to be a key battleground for the dollar. Event risks this week will therefore determine whether 2023 starts with a focus on the inflation battle being won and the prospect of stimulative, reflationary policy coming through - a dollar negative. Or whether sticky inflation ties the hands of central bankers, the US yield curve remains steeply inverted and the dollar continues to perform well in a challenging risk environment. We do see the latter scenario as more likely, but this week should certainly give one of the scenarios a big lift. There is very little on the US calendar today and we would expect DXY to go into tomorrow's CPI release near its current 105 levels. Chris Turner EUR: A big week for central bank meetings in Europe This week sees central bank meetings in the eurozone, Switzerland and Norway, where 50bp hikes are expected in the former two and a 25bp hike in the latter. Please see our full European Central Bank preview here and our Swiss National Bank preview here. On the former, we note there is still a slight risk of the ECB doing 75bp rather than 50bp - which would probably help the euro. But this of course comes after the US CPI/FOMC risk. Given the 10% EUR/USD correction off the late September lows, our preference would be that EUR/USD struggles to hold any gains over 1.06 this week and could end the week lower should US events oblige.  Chris Turner GBP: BoE to hike 50bp this week This week's highlight will be the Bank of England meeting on Thursday. Please see our full preview here. We expect the BoE to revert to a 50bp hike (55bp hike priced) as it tries to balance high inflation against growing evidence of a prolonged downturn - with little signs of stimulus.  Our game plan assumes that GBP/USD struggles to hold any gains over 1.23, while EUR/GBP should find support in the 0.85/0.86 area. A winter of discontent should see sterling underperform should central bankers need to keep rates tight(er) into a recession.  Chris Turner CEE: Asymmetric response to global developments A busy week at the global level will be accompanied by several data points from the Central and Eastern Europe region. This week's headline number will be November inflation in the Czech Republic. We expect inflation to accelerate from 15.1% to 15.9% year-on-year, slightly above market expectations. The number will have the market's attention not only because of the Czech National Bank meeting next week but also because of the surprising slowdown in inflation in October when government measures against high energy prices came into play. After this number, we can then expect more headlines coming from the CNB given Thursday's start of the blackout period. Also today, Hungary's assessment is expected to be discussed at the European Council level. However, early rumours suggest that the European Commission's conclusion remains unchanged. November inflation in Romania will be published on Tuesday. We expect an increase from 15.3% to 16.6%, above market expectations. Although we have already seen inflation slowing in previous months, this result would thus raise the peak again. We do not expect another rate hike from the National Bank of Romania in January, but either way, it will be a close call, and tomorrow's number could be key. In the second half of the week, we will then see secondary data across the region such as the current account balances in Poland and the Czech Republic and the final inflation estimate in Poland, including the core number. In the FX market, this week we will be watching the impact of global events on the region. Our baseline scenario of a stable EUR/USD should not bring too much change for the region, but risks both ways are significant and higher volatility compared to previous rather quiet weeks in the CEE FX market can be expected. As we mentioned earlier, interest rate differentials have fallen significantly over the past weeks in the region leaving FX vulnerable to global shocks. Also, the gas story is creeping back and with higher gas prices we see growing signs of a renewed relationship with FX. The region's reaction would thus be asymmetric in the direction of weaker FX in our view, if the US dollar ends up as a winner this week. The Hungarian Forint will be following a separate story in addition to the EU developments and the newly lifted fuel caps. Given the negative rumours, more pain for the forint can be expected and the question is whether EUR/HUF will make another march towards the 430 level as it did in October, which led the central bank to an emergency rate hike in the middle of that month. In our view, the long positioning has fully unwound, and the market is leaning towards the short side again, but we don't think that the negative outcome of the EU story is fully priced in, so it is likely that we will test new highs this week. Frantisek Taborsky Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The market is focused on the US growth story and the dollar is more and more influenced by data prints. Today's PMI numbers should help limit downside exposure for the dollar. The euro remains supported by ECB officials fighting speculation of a 25bp hike. Hungary's central bank tests market sensitivity on an upcoming rate cut Some improvement in the market's sentiment around the health of the service sector in the US should help limit downside exposure for the dollar USD: Data-related risks are back Risk assets have started the week on the front foot, with equities rising yesterday in Europe and the US while Chinese markets are closed for the whole week. The dollar remained moderately offered. It’s become increasingly clear that larger swings in the dollar are now driven by data releases given the market's heightened sensitivity to the US growth story ahead of next week’s Federal Open Market Committee (FOMC) meeting. Preliminary PMIs will be released across developed markets today, and despite the surveys not being as highly regarded as the ISM in the US, that elevated sensitivity to data likely makes today’s releases a risk event for the dollar. Consensus expectations are centred around a modest recovery in the service index and in the composite survey. Some improvement in the market’s sentiment around the health of the service sector in the US should help limit downside exposure for the dollar. In that case, DXY may hold around 102.00 today unless PMIs in Europe surprise to the upside. Richmond Fed manufacturing data is the other release in the US calendar today. In the rest of G10, AUD has cemented its position as the most popular long trade in 2023, breaking decisively above 0.7000 yesterday. Tonight’s fourth-quarter CPI data in Australia will be key, as evidence of sticky inflation may force a hawkish repricing across the AUD curve (which currently embeds 40bp of extra Reserve Bank of Australia tightening) and add steam to the AUD/USD rally. CPI figures are released also in New Zealand tonight, and we see a larger risk they could show a deceleration in price pressures compared to Australia. AUD/NZD may retest the recent 1.0950 highs soon as the NZD curve has more room for a dovish repricing. Francesco Pesole EUR: Reality check Given that part of the recent EUR strength has relied on a re-rating of growth expectations in the eurozone thanks to lower energy prices, today’s PMIs will likely be a reality check on the sustainability of this driver for the common currency. Consensus expectations are moderately upbeat and signal that the PMI services index could return above 50.00 for the first time since July. Still, it will now take quite a good deal of positive news to push another big idiosyncratic euro rally. It seems more likely that EUR/USD could test 1.1000 on the back of rising market risk appetite weighing on the safe-haven dollar, if anything. At the same time, the effective pushback by ECB officials against speculation around 25bp hikes is likely limiting downside risks for the pair. President Christine Lagarde has one last chance to deliver any remark today before the quiet period kicks in ahead of next week’s meeting. A mere reiteration of her recent rhetoric, however, seems highly likely at this stage. Francesco Pesole GBP: Limited upside room against the euro PMIs may look a bit grimmer in the UK compared to the eurozone today, which could hinder the modest rebound in EUR/GBP seen over the past two trading sessions. The pair may struggle to climb above 0.8830-0.8850 for now. Still, the pound should be able to count on a generalised alignment in market expectations around a 50bp hike by the Bank of England next week (45bp priced in at the moment), which suggests a smaller scope for a correction.  Francesco Pesole HUF: Central bank assesses progress at home and abroad This week's highlight in the region is the National Bank of Hungary (NBH) meeting today. The central bank has made it clear that it wants to see a tangible and permanent improvement in risk sentiment. This means an improvement on the geopolitical side and on internal issues such as the Rule of Law, the current account deficit, and inflation. While we have seen some progress on all of these issues, in our view it is not enough for the central bank. However, after the progress in the EU story and lower-than-expected inflation, markets are already looking for indications of the NBH cutting rates, which are the highest in the CEE region. We expect the central bank to confirm its intention to keep interest rates high for longer today. However, we concede that the current situation could be tempting for the central bank to test the market by sending a dovish message. Increasingly, the market is seeing signs of speculation of a too-early interest rate cut. If the NBH resists the temptation and confirms the hawkish tone, we expect the current speculation to cool down and the forint could get back on track. In addition, yesterday's reaction to Fitch's downgrade of the rating outlook to negative could slightly clear long positioning and clear the way for further forint appreciation. In that case, we expect that the forint could test 390 EUR/HUF soon. Otherwise, the current positioning favours a rather asymmetric reaction negatively towards EUR/HUF 400. Frantisek Taborsky Read this article on THINK TagsHungary FX Daily Dollar Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

FX markets start the week on a quiet footing, with US markets closed for Presidents Day. The US highlights this week will be the FOMC minutes (Wednesday) and January's core PCE deflator (Friday) - both providing input into the Fed's 'higher for longer' policy narrative. We will also get PMI business confidence updates and hearings for the new BoJ governor USD: Price action suggests rally could be running out of steam Dominating global FX and rate markets last week continued to be the Federal Reserve narrative of rates staying 'higher for longer'. Some slightly higher-than-expected inflation prints and hawkish commentary - putting 50bp hikes back on the table - helped drive US yields and the dollar higher. Friday's price action, however, suggested that February's hawkish re-pricing of the Fed story might have come far enough for the time being. US yields reversed from highs seen in early Europe on Friday and DXY dropped quickly from a high of 104.60. On Friday, we had said that this DXY rally could extend to 105.00 or, with outside risk, to 106.50. Yet Friday's price action suggests those levels could be out of reach. Determining whether this month's dollar bounce has any further to go will be two key inputs. The first is Wednesday's release of the FOMC minutes of the February meeting where the Fed hiked 25bp. As ING's US economist, James Knightley, discusses in the week ahead, the focus will be on how close the Fed was to hiking 50bp at that meeting. Watching Fed Chair Jerome Powell's press conference at that meeting, he came across as pretty relaxed and announced that the disinflation process had started. However, the market could be sensitive to suggestions that a 50bp hike had been a close call. On the same subject, Friday's release of the January core PCE deflator - expected at 0.4% month-on-month - will also shed light on the disinflation story. Overall our base case is that February's dollar rally is a correction - but this week will determine whether it runs out of steam or has a little further to go. In addition, this week will see much focus on the anniversary of Russia's invasion of Ukraine and a potential speech from Russian President Putin. In addition, the dollar story could on Friday be driven by USD/JPY. Here, nomination hearings take place for new Bank of Japan Governor, Kazuo Ueda. He is seen as more of a pragmatic academic than the ultra-dove of his predecessor, Haruhiko Kuroda. Any hints of a change to the BoJ's ultra-dovish monetary policy could see USD/JPY sell off again - dragging the broader dollar with it. Expect narrow-range trading in DXY today. Chris Turner EUR: PMIs in focus this week EUR/USD bounced off a low at 1.0613 on Friday - largely as US rates softened through the day. Interestingly, EUR/USD did not seem to take too much notice of comments by the European Central Bank's Isabel Schnabel that the disinflation process had not even started in the euro area. Two-year EUR swap rates jumped 8bp on the remarks, but had completely reversed by the end of the day suggesting market participants feel the hawkish story might have come far enough for the time being. This week, the eurozone focus will be on business confidence in the form of PMIs and the German Ifo. The PMI readings are seen hovering around the 50 area and the market may take more notice of the Chinese February PMI readings which come out later next week. As above, the dollar rally might have come far enough for the time being and EUR/USD found good demand ahead of 1.06. It will probably require quite a hawkish set of FOMC minutes on Wednesday for EUR/USD to break towards 1.05 - where we expect to see good demand ahead of a EUR/USD rally in the second quarter. Elsewhere, the focus will be on Sweden today and the release of the minutes of the central bank's February policy meeting. That meeting delivered a hawkish 50bp rate hike. Let's see whether the minutes shed any further light on how concerned the Riksbank has been with recent weakness in the krona.  Chris Turner Read next: Twitter And Elon Musk Faced A Growing List Of Claims| FXMAG.COM GBP: Sunak struggles to make progress Sterling enjoyed a modest recovery on Friday as the dollar softened through the day. We doubt sterling strength owes much to PM Rishi Sunak trying to make progress on revisions to the Northern Ireland protocol. Here, eurosceptics in the Conservative party, including former PM Boris Johnson, will try to thwart any progress. And Sunak will be reluctant to have to rely on opposition Labour votes to win progress in parliament. Instead, it will probably continue to be monetary policy that drives FX trends. There is little UK data this week, but we will hear from a few more Bank of England speakers. We think BoE rates will peak at 4.25% in March - not that far from market pricing of a peak at 4.35%. Expect EUR/GBP to stay range-bound and GBP/USD to be bounced around by the dollar trend. Chris Turner CEE: Back to gains As we head into the second half of the month, the calendar in the region is lighter this week, but even so, Poland remains in the spotlight. Last Friday, S&P kept its rating unchanged with a stable outlook. Today, we'll see industrial and labour market data for January. We expect industrial production to increase by 4.4% year-on-year, slightly below market expectations. Also tomorrow, Poland will release retail sales for January. Here, we expect a slightly higher number compared to surveys. On Thursday, we continue with unemployment numbers in Poland before moving to the Czech Republic on Friday, where consumer confidence for February will be released. In the FX market, we saw a wave of selling in the CEE region last week but also a boost in interest rate differentials limiting a more pronounced sell-off in our view. The global story should play out this week and with the US dollar running out of steam, the CEE region should return to gains. The main focus will be on the Hungarian forint and Polish zloty. We believe the forint should outperform and benefit from the massive rise in market rates last week. Moreover, the depreciation has eased the pair in a crowded long trade. Thus, we expect a return to 380 EUR/HUF. The zloty should still find its way out of last week's European Court of Justice ruling. We expect stabilisation around the current 4.76 EUR/PLN. However, we are likely to see more headlines following the ECJ ruling which could point to a new direction. Frantisek Taborsky Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

FX Daily: A close call on the Bank of Canada today We expect a hawkish hold by the Bank of Canada today, but pressure on policymakers to hike has risen and it’s admittedly rather a close call. We don’t think it’s a make-or-break event for CAD – but we should keep an eye on the implications of a hike for the broader market and the dollar. In the CEE region, the main focus will be the NBP press conference.   USD: Lack of domestic factors A quiet data calendar has left the pricing for the Federal Reserve's June meeting little changed, with a 20-25% implied probability of a hike after the soft ISM services figures on Monday. That and the generally supported environment for equities haven’t triggered any substantial dollar correction though.   The market’s bearish mood on European currencies remains the prevailing theme, and the dollar’s resilience probably denotes reluctance to add dollar shorts ahead of the US CPI risk event on 13th June – which is still seen as having the potential to tilt the balance to a hike the following day.   We think markets will watch the Bank of Canada decision (which we discuss in detail in the CAD section below) with great interest today. Following the Reserve Bank of Australia rate hike yesterday, another hawkish surprise from a developed central bank in the run-up to the FOMC meeting could cause the revamp of some hawkish speculation, especially considering Canada’s economic affinity with the US.   Given the lack of other market-moving events today, a BoC hike could end up supporting the USD too. But, as discussed in our BoC preview, we expect a hawkish hold – in which case the spill-over into the dollar may not be very material given that should be insufficient to prompt markets to price out the implied chances of a Fed June hike currently embedded in the USD curve.

CEE: Dovish NBP leads us to bearish view on zloty Today, another series of economic data from the CEE region continues. Industrial production data will be published in Hungary and retail sales for April in the Czech Republic. Later, the Czech National Bank will release intervention numbers for April – but it can be assumed that the central bank was not active in the market given the current EUR/CZK level. The last time the central bank intervened in the FX market was last October.     Later today, at 3pm local time, we will see a press conference from the Governor of the National Bank of Poland. As expected, rates remained unchanged yesterday and the statement didn't show anything new either. Today's press conference will be the main focus of the market and we can expect a rather dovish tone supported by lower-than-expected inflation for May.     The situation in the FX market in the region remains unclear in what direction it will take. The Polish zloty will of course be the main focus. Given the expected dovish tone of the governor, the market is likely to be open to price in more monetary easing, pushing the interest rate differential down.   However, this is not the main driver at the moment and if anything, it is more global sentiment that is deciding the zloty. At the same time, it is hard to see what role the MinFin operation in the FX market may play in the strongest levels of the zloty since June 2021. However, the strong long market positioning and dovish NBP leads us to a rather bearish view on the zloty and we see a rather higher EUR/PLN after the end of the press conference today above 4.490.

CEE: Global story favours stronger FX Romania's inflation numbers for May were released this morning, showing a drop from 11.2% to 10.6% YoY, above market expectations. At the same time, Romania confirmed the lowest inflation within the CEE region. For the rest of the day, the calendar doesn't have much to offer. In the Czech Republic and Poland, we will see April's current account numbers, which recently turned into a surplus in both countries.   Otherwise, the global story will be more interesting for FX markets. Higher EUR/USD and risk-on sentiment indicates positive conditions for CEE FX. The Czech koruna should correct slightly towards 23.75 EUR/CZK after yesterday's depreciation to almost 23.80 EUR/CZK. However, the main focus will be back on the Polish zloty, which is holding near record strong levels ahead of Thursday's European Court of Justice ruling on the FX mortgage case. Given the favourable global conditions, we see no reason for depreciation for now, rather we expect a stagnation around EUR/PLN 4.45.

The CEE region in general offers quite a heterogenous picture in terms of tourism importance and development. Some countries in the region (eg, Croatia, Bulgaria, Montenegro) are highly dependent on tourism revenues and its indirect effects, which can account for more-or-less a fifth of their GDP. These countries benefited greatly from a tourism boom that lasted almost a decade but which came to an abrupt end in 1Q20.   However, the selected CEE countries we cover in this article have more sophisticated economies and although they may still have sizeable tourist sectors (eg, Hungary and Turkey), the diversification of their economies offers an important cushion in less impressive tourist years.     The type of tourism also varies greatly among these countries, not only between Turkey and CE4 but even within the CE4. Hungary and the Czech Republic benefit more from tourism focused on their capital cities, while for Poland and Romania, tourism is less concentrated and more evenly spread across regions. Turkey, on the other hand, offers a broad range of mass tourism destinations, both cultural and leisure.   As elsewhere, 2020 was a lost year for tourism in the CEE, with lingering effects into 2021 as well. In fact, apart from Turkey, which has recovered strongly, CEE countries are still struggling to reach pre-pandemic levels in terms of total tourist arrivals. While Poland and Romania are only marginally above 2019 levels, Hungary and the Czech Republic have a lot more to recover. It is worth mentioning that domestic tourism has been the main driver of recovery in many countries - one of the few positive dynamics that developed through the pandemic.   Key indicators of foreign tourism, selected CEE countries (2019-2022)   If we turn our attention only to international arrivals, the picture is even more grim for the CE4 group, as no country was above 2019 levels by the end of 2022. Arguably, the outlook appears much better for Hungary, which, on the one hand, still has more to recover while, on the other hand, should benefit from the ongoing Chinese reopening and new direct flights between China and Hungary.   To some extent, this could have positive spillover effects for the Czech Republic given the proximity and relatively good connecting infrastructure. While relative comparisons have their advantages, they can grossly understate the huge nominal differences between Turkey and the rest of the CE4. Prior to the pandemic, the combined CE4 international arrivals significantly exceeded Turkey’s arrivals (with a clear trend nevertheless in favour of the latter), but the situation has changed dramatically in the post-pandemic era as CE4 numbers have dropped roughly to one third of Turkey’s.   It is worth mentioning that of the five countries, Turkey, Hungary and Poland have a clear positive balance when it comes to travel receipts and expenditure, while the Czech Republic flirts with negative balances and Romania is a confident net payer of tourism receipts.   The importance of the tourism sector for the CE4 and Turkey is generally above the EU average, with a tendency to be quite sizeable in Turkey and Hungary. Given its size and geographic location, Turkey stands out both in nominal and relative terms, whether in respect of tourism’s importance for GDP, the number of visitors, air connectivity or types of tourism it can provide. Having ranked in the top five countries worldwide by number of tourists visiting, Turkey’s tourism revenues help to some extent compensate for the large goods deficit in the balance of payments. Improvements in tourism are likely to maintain its healthy growth trend in the period ahead.   The CE4 economies offer yet again a rather heterogenous picture, with Romania somewhat departing from the group when it comes to road and rail connectivity with the west, though arguably offering a wider range of destination types. As Romania is not particularly well connected with its CEE peers it cannot match Turkey’s much wider accessibility for types of tourism.    Tourism is key for Hungary with a high share within its GDP and the potential for more growth from Asian tourists. And a return of tourism should be welcome for both Poland and the Czech Republic, although net tourism receipts seem less important for the latter

FX strategy (with Frantisek Taborsky, EMEA FX & FI Strategist) HUF has been the clear winner YTD in the CEE region thanks to the subsiding energy crisis and very attractive carry due to the extreme high interest rate environment. Despite the first rate cut, HUF did not weaken thanks to the NBH’s transparent communication, which we expect will continue to remain as transparent as it has been so far this year.   We expect that the market will continue to favour the forint, which will continue to maintain a significantly higher carry within the region in the second half of the year. In our view, the playing field for the forint will be in the range of EUR/HUF 368-378 in the coming months and we target 372 for the end of the year.   Thus, we do not see much room for a move lower from current levels, which is supported by the very long positioning of the market. This will prevent further gains in the forint. We can still expect the NBH monetary policy and EU money story to be the main drivers. Higher volatility will remain in the market in the second half of the year and we may see some seasonal FX weakness especially during the summer months. However, market expectations for EU money are rather cautious and so we do not see room for a big sell-off, similar to that at the end of last year over this issue. Moreover, we should see a deal ultimately being agreed between the EC and the Hungarian government. Overall, we continue to like the forint and the NBH normalisation story. We expect investors might use any EUR/HUF spike to build new positions in forint and benefit from the significant carry.   FX – spot and INGF   Evolution of gross external debt (% of GDP)   Fixed income strategy (with Frantisek Taborsky, EMEA FX & FI Strategist and James Wilson, EM Sovereign Strategist)   The market is pricing in a large portion of NBH monetary policy normalisation, but we believe that the region's fastest disinflation and a record strong forint will support further market bets on policy easing. Our bias remains for a lower and steeper curve.. On the bond side, despite fiscal risks, we see this year's funding fully under AKK's control. HGBs post the highest gains within the region YTD, supported by the NBH's successful normalisation story and government measures.   On the other hand, HGBs are getting expensive after the recent rally. In the hard currency space, current valuations look about fair for REPHUN, with spread levels towards the wider end of the BBB tier.   Headline risk remains high amid the ongoing EU fund negotiations and geopolitical noise, which mean there are potential upside and downside catalysts, and volatility will remain elevated. Meanwhile, fundamentals are recovering from last year’s energy shock, in particular on the external accounts. Further FX issuance is likely later in the year, with the AKK guiding for a potential benchmark size EUR issue, in part to prefinance for 2024.   Local curve (%)   Public debt redemption profile (end-Mar 2023, HUFbn)

What about the forecast changes? Perhaps the most important change will be that, as the extreme risk scenarios have now disappeared, the central bank will hopefully also narrow the updated forecast ranges when it presents the main figures in the June Inflation Report. A narrowing of the forecast range downward would send a rather strong message regarding GDP growth in 2023. This would put the central bank in the ranks of those who do not think it likely that GDP growth of 1.5% will be achieved this year. However, as the economic outlook now depends largely on the performance of agriculture, it may still be justified to maintain a wider band.   ING's expectations regarding the NBH's forecasts   There is a lot of uncertainty around GDP growth next year, so perhaps there is no point in seriously revising expectations. As for inflation, the NBH is likely to raise its forecast, if only because of the change in the excise duty from 1 January 2024. In addition, an inflation rate clearly above 3% could also send an important message to markets, supporting the central bank's new stance that sustained tight monetary policy with a continuous real positive interest rate environment is needed to achieve the inflation target in a sustainable manner.   Our market views The Hungarian forint has come under pressure for the first time in a while, reaching its weakest level against the euro since the end of May. We see EUR/HUF in a 368-378 range for the rest of the year and see the current higher values as only temporary. The market will probably want to wait for the NBH meeting to see how it sees the situation. However, we believe the market will use weaker forint levels as an opportunity to build new positions and benefit from the highest FX carry within the region. Thus, we expect the forint to return more towards the lower end of our range around EUR/HUF 370 next week.   In the rates space, we see the market more or less fairly pricing in the rate cuts this year and the super short end is thus anchored. However, looking at the longer 1-3y horizon, we see room for the market to further price in some normalisation of NBH policy. Our long-term view thus remains unchanged and the 2s10s spread should steepen with the entire curve moving lower, and catching up with the market. In the short term, for next week, we see major scope for a move within the short end of the curve and a flattening in the 1s3s segment that may get the market's attention.   Hungarian Government Bonds (HGBs) have had a massive rally in recent weeks and are posting the highest overall returns in the CEE region this year. We continue to like HGBs, which benefit the most from the whole story in Hungary, further supported by government measures and funding fully under the control of the debt agency. In the coming days, we could see some profit-taking and upward yield pressure from core rates, however, we still see HGBs as expensive relative to CEE peers. On the other hand, it is hard to see a significant trigger for a sell-off and we expect the market to continue to like HGBs.

FX Daily: Quiet start to an intense week The Independence Day holiday in the US means the week should start quietly in markets, but US data will soon attract the market's attention again now that a July Fed rate hike is a consensus view and there is also speculation about a move in September. We think the dollar can find some support this week. In the CEE region, central banks in Romania and Poland meet.   USD: Data in focus amid thin holiday volumes The month of June saw the dollar weaken against all G10 currencies except for the Japanese yen, but the greenback has been quite supported in the past few days. Some hawkish comments by Federal Reserve Chair Jay Powell at the Sintra central bank symposium last week have helped markets to close the gap with the FOMC’s dot plot projections: the Fed funds futures curve currently prices in 34bp of tightening to the peak, a 10bp increase compared to a week ago. Crucially, markets are now actively considering the option of two rate hikes. This week should start quite quietly with the Independence Day holiday meaning US markets should have reduced flows until tomorrow. Still, US data activity will peak as markets assess the probability of a September hike now that a July increase appears to be the consensus view. Today, all eyes will be on the ISM manufacturing index, although a greater focus will be on the services survey released on Thursday (the May print dropped more than expected). On Friday, jobs figures for the month of June will be published: after the latest comments by Powell, it will probably take a very weak reading to put a July hike under discussion. On the Fed side, the first event to note is on Wednesday, when the June FOMC minutes are released. The dollar can probably find some more support this week as markets see more reasons in the data and the minutes to gradually align with the more hawkish dot plot projections.

CEE: Gas prices as a window to a cheaper forint Today's calendar in the region is basically empty and thanks to the US holidays we can expect lower activity in the CEE region as well. Yesterday's trading ended with a weaker forint and flat koruna despite our expectations. As we mentioned yesterday, gas prices have once again become a strong driver for HUF and CZK in recent weeks. Yet, at the end of yesterday's trading, a decline in gas prices was already observed after the end of some seasonal work in Norway which limited the capacity of flow. Gas flow is thus slowly returning to normal and in our view it is too early to worry about storage levels in import-dependent countries such as Hungary and the Czech Republic ahead of the upcoming winter. We thus see the current depreciation of the HUF and CZK as temporary and, especially in the case of Hungary, we expect the market to take the opportunity to buy the forint at a discount and benefit from the still massive carry. In addition, June inflation in Hungary will be published on Friday, which we think has a good chance to surprise to the downside compared to market expectations. Yet, in the last three months, lower inflation has been a signal for the market to buy the forint as confirmation that things are returning to normal in the country with the highest inflation in Europe. Overall, we still expect the forint to return to 370 EUR/HUF by the end of this week.

PLN: Record strong zloty day before NBP decision The two-day meeting of the National Bank of Poland starts today in Poland. While we can expect headlines tomorrow, the Polish zloty is once again clamouring for attention. EUR/PLN touched its lowest levels since early 2021 yesterday. We remain positive on the zloty, however, as we estimate that positioning must be extremely long at the moment –most significantly in the CEE region. Moreover, we can expect a dovish report from the NBP tomorrow. The market has priced in a lot of rate cuts for this year over the past week without significant damage to the zloty. Thus, the current account surplus, strong FDI flows and the dampening of volatility through MinFin operations in the market will continue to support the zloty, but we expect further gains to be at a slower pace.

CEE: Dovish NBP should not push zloty to weaker levels Apart from the morning data from Romania and Hungary, the main event on the calendar in the CEE region is the meeting of the National Bank of Poland. After noon we should see the central bank's decision, statement and the basic framework of the new NBP forecast. Governor Adam Glapinski's press conference is scheduled for Friday. In line with the market, we expect rates to remain unchanged and the main focus will be on the new forecast and tomorrow's press conference, in our view. Both can be expected to be dovish in tone. The market has moved significantly in that direction over the past two weeks and is pricing in roughly 100bp of rate cuts by year-end at this point. Thus, the news from the NBP should not come as a surprise to the market though pressure to price in even more rate cuts could be expected. The Polish zloty joined the sell-off across the region yesterday amid a combination of deteriorating sentiment in Europe, a lower EUR/USD and heavy long positioning in CEE FX especially in the zloty and forint, which lost significantly more than the Czech koruna yesterday. Thus, in the case of PLN, despite the dovish NBP, we should not see much pressure for further weakness today but rather some stabilisation around 4.460 EUR/PLN.

Czech inflation back in single digits Inflation fell into single-digit territory for the first time since early 2022 and is the lowest in the CEE region. However, this will not be enough for the Czech National Bank to change its tone. Disinflation will slow next month. We do not expect the first cut until November.   Lowest inflation in the CEE region June consumer prices rose 0.34% month-on-month, which translated into a drop from 11.1% to 9.7% year-on-year. Inflation in the Czech Republic is the lowest since December 2021 and the country is now the first in the CEE region to have returned to single-digit territory. Prices were pushed up in June mainly by seasonal factors in recreation prices. Otherwise, we saw a steady rise across the consumer basket. Core inflation fell from 8.6% to 7.8% YoY with downside risk, according to our calculations. The CNB will release official numbers later today, as always. June inflation is four-tenths below the central bank's forecast, but this means a one-tenth reduction in the previous forecast deviation. Core inflation in the second quarter, by our calculations, surprised the central bank to the downside by two-tenths on average.   Contributions to year-on-year inflation (bp)     The CNB wants to see more before cutting rates Looking ahead, our fresh nowcast indicator points to July inflation falling to 8.6% YoY. The pace of disinflation should thus start to slow in line with our earlier expectations. Therefore, we think today's result will not be a game-changer and the current drop in inflation will not be enough for the CNB. Today's inflation number is the last before the central bank's August meeting, including a new forecast. We expect the CNB to wait to cut rates until the November meeting with the risk of postponement until the first quarter of next year.

CE4 currencies are expected to remain well supported despite the prospect of broader monetary easing across the CEE region. Stronger levels against the euro, however, may be hard to achieve. Elsewhere, the softer dollar environment may paper over a few cracks in the domestic stories for both the South African rand and the Israeli shekel     Scope for further PLN gains seems limited. According to the central bank’s estimates, profitability of Polish exporters ceases around 4.30. €/PLN moving below 4.40 should encourage the Ministry of Finance to refrain from converting FX proceeds via the market. Also, based on our estimates (relative value model, gauging €/PLN against other market variables) the zloty is currently somewhat overvalued against the euro. Based on available market comments, we fear that investors may be overly confident in a market-friendly conclusion to this year’s parliamentary elections. Also, with recovering internal demand, the current account surplus should vanish next year. This calls for a higher €/PLN in the fourth quarter and in 2024.\    

EUR/CZK: Koruna stuck despite favourable fundamentals     The koruna seems to be trapped in the 23.60-23.90 EUR/CZK band and nothing is likely to change even during the summer. However, we remain positive on the koruna, which should benefit from the Czech National Bank's hawkish rhetoric, the highest beta against EUR/USD within the CEE region and the market's light positioning. Together, these should help it to stronger levels for the rest of the year. The CNB remains the most hawkish central bank in the region despite the rapid decline in inflation. The market is pricing in a 100bp rate cut by the end of this year. We expect the first cut in November with the risk of a delay until the first quarter of 2024.  

EUR: ECI to the rescue Thursday proved a bad day back in the office for EUR/USD. The ECB press conference proved a negative for the euro as ECB President Lagarde backed away from a September rate hike and seemed to acknowledge both softer activity data and welcome disinflation. This was not really a bloodbath for the euro – indeed the trade-weighted euro did not move too much, nor did two-year rate differentials. It just so happened that we had some strong US data coming out at the same time. If we are right today with our call for a soft ECI number, we could see EUR/USD breaking back above 1.1000 and starting to trace out the kind of 1.1000-1.1150 range over the coming sessions. Chris Turner As usual this week, the calendar in the CEE region doesn't have much to offer. But still, like yesterday, CEE will have to consume the global story, which brought a lot of new news again. The main news here is of course the lower EUR/USD, which complicates the positive picture we described yesterday for CEE FX. But on the other hand, positive market sentiment is going full speed ahead with the end of the global hiking cycle in sight. Thus, FX in the region has every right to be confused about which direction to go now. We are leaning more on the bullish side again, but EUR/USD will be a problem and hold back further gains for CEE FX today.

CEE: Inflation in Hungary finally below 20% Yesterday's meeting of the National Bank of Romania (NBR) was as expected and there were no surprises. Tomorrow, the NBR will present a new inflation report, however, for now we have silence from this side. This morning, July inflation in Hungary was released, posting a drop from 20.1% to 17.6% year-on-year. This is 0.1pp below market expectations and 0.1pp above central bank expectations. While inflation remains by far the highest in the CEE region, it is below 20% for the first time since last September and we expect it to be in single-digit territory by the end of the year. This is good news for the economy and the central bank, but also good news for the forint. Without many surprises, the market has no reason to push the central bank to cut rates faster, undermining the main attraction – FX carry. This, despite the decline in recent weeks, is one of the highest in the emerging market universe and by far the highest in the CEE region. Later today we will also get the Hungarian state budget result for July. The last two months show signs of stabilisation of the deficit at 85% of this year's target. State budgets are showing bad numbers across the region. However, in the Czech Republic, we have already seen the trend turn over, and in Romania, the government is trying to come up with a revision of the state budget in an attempt to keep the numbers under control. Today, we expect the deficit in Hungary to remain roughly unchanged. This should be good news for Hungarian government bonds. However, in case of a negative surprise, we could also see a spillover into FX due to the higher market attention. Moreover, this topic is of course linked to the EU money issue, which we expect to be back on the table in the coming weeks. So overall, everything revolves around the Hungarian forint at the moment. Values around 390 EUR/HUF open the question of whether we will hear some comments from the National Bank of Hungary, given that we are entering sensitive waters. Market positioning is probably rather balanced after the sell-off over the last few days, so we believe this leg of the move-up is over. But it is also hard to see a quick recovery. Despite a lot of local story, the correlation with the US dollar has been almost perfect for the past month. In other words, the main driver in our view is global factors and we don't see too much potential either way on this into US inflation numbers. So EUR/HUF may try to lower levels but we don't expect a big rebound after today's numbers.

PLN: Damage control after a closed market We have GDP data in the region with second-quarter results across the board. We expect -0.3% year-on-year in Poland, -1.2% YoY in Hungary and +2.4% YoY in Romania, all more or less in line with market expectations. To complete the picture, the Czech Republic reported -0.6% YoY earlier. Also later today, core inflation in Poland will be released. We estimate that core inflation moderated to 10.5% YoY from 11.1% YoY in the previous month. The Polish market opening after yesterday's holidays and Monday's limited trading will be especially interesting. By comparison, Czech rates have strictly followed core rates in the last two days and the Polish market should catch up today. But at the same time, yesterday the Polish zloty almost touched the upper boundary of the long-term range of 4.40-4.50 EUR/PLN, which we last saw in early July. As we mentioned earlier, for the entire CEE region, the US dollar still seems to be the main driver, indicating weaker values across the board. At the same time, yesterday we saw gas prices jump back to 40 MWh/EUR following news from Australia, again not signalling positive conditions for CEE FX. On the other hand, the interest rate differential is starting to play a role in the region again after some time and if PLN rates catch up after the close of trading, EUR/PLN should stave off touching the 4.50 level and return to 4.46. But a stronger US dollar on more negative news for EM FX is a clear risk here.

CZK: Koruna is only one in the region to resist global influences The Czech koruna is the only currency in the CEE region that has surprisingly resisted losses. The widely expected depreciation after the end of the Czech National Bank's intervention regime two weeks ago did not come and, moreover, the strong US dollar does not seem to be weighing on the koruna. The balance sheet data also refutes any suspicions that the central bank would be active in the market again and prevent the CZK from weakening. IRS rates are following US rates in a rapid pace upwards, which was probably helped by the very stretched dovish expectations earlier. Plus, it appears the CNB hawkish story may have one more mini episode thanks to the spike in fuel prices following the August excise tax hike. This, by our calculations, could lead headline inflation above the CNB's forecast, whereas so far inflation has basically only surprised to the downside in recent months. Thus, the market may later find the current upward correction in rates to be justified. But it is too early to tell. For now, however, the interest rate differential in the Czech Republic seems to be the only one on a significant upswing, supporting FX. Based purely on yesterday's rate move, our model indicates that this could be enough for the koruna to move below 24.0 EUR/CZK for the first time since the last CNB meeting. Of course, the Czech Republic is not in a vacuum and a stronger US dollar or higher gas prices could also have an impact here, but for now it seems to be an island of safety in the region.

CZK: Koruna is only one in the region to resist global influences The Czech koruna is the only currency in the CEE region that has surprisingly resisted losses. The widely expected depreciation after the end of the Czech National Bank's intervention regime two weeks ago did not come and, moreover, the strong US dollar does not seem to be weighing on the koruna. The balance sheet data also refutes any suspicions that the central bank would be active in the market again and prevent the CZK from weakening. IRS rates are following US rates in a rapid pace upwards, which was probably helped by the very stretched dovish expectations earlier. Plus, it appears the CNB hawkish story may have one more mini episode thanks to the spike in fuel prices following the August excise tax hike. This, by our calculations, could lead headline inflation above the CNB's forecast, whereas so far inflation has basically only surprised to the downside in recent months. Thus, the market may later find the current upward correction in rates to be justified. But it is too early to tell. For now, however, the interest rate differential in the Czech Republic seems to be the only one on a significant upswing, supporting FX. Based purely on yesterday's rate move, our model indicates that this could be enough for the koruna to move below 24.0 EUR/CZK for the first time since the last CNB meeting. Of course, the Czech Republic is not in a vacuum and a stronger US dollar or higher gas prices could also have an impact here, but for now it seems to be an island of safety in the region.

However, more recently even this dynamic has become less certain when looking forward. Issuers in the CEE region (that over the past decade had largely shifted to local debt, or in EUR when needed) have ramped up their USD sovereign bond issuance since late 2022, preferring the large potential investor base and better liquidity in this market. While it is unlikely to mark a long-term trend and reverse the dynamic seen in the past decade, in the coming few years USD bond issuance will remain an active area for most EM sovereigns.   Another area of ‘de-dollarisation’ that can be observed across some emerging markets in within domestic banking systems (Figures 29 and 30). A key aim for many governments in reducing vulnerabilities to a crisis has been to reduce the share of FX loans and deposits within their banking systems, which in practice has been reducing the role of the dollar (or the euro for some EM Europe economies). Within the BRICS economies, we can observe a general downtrend in the FX share of loans within the banking system since around 2015, and a similar story for Russia, India and South Africa in terms of FX liabilities.        

CEE: Higher rates offset stronger US dollar Today's calendar in the CEE region has little to offer. FX seems untouched after the FOMC minutes, although there are a few things we should highlight. On one hand, the US dollar and equity markets are still pointing to weaker CEE FX. On the other, rate differentials are climbing higher across the board, especially in the Czech Republic and Poland. In addition, the US rate spike just after the FOMC minutes has added impetus to this. Thus, in the Czech Republic, the 2y rate spread against the euro reached its highest level since the beginning of July. In Poland, the spread jumped to the highest levels in a week. This should at least offset the negative impact of a stronger US dollar. However, at least in the Czech Republic, the effect of higher rates could outweigh and EUR/CZK could finally get below 24.0 for the first time since early August.CEE Market Update: Higher Rates Counterbalance Stronger US Dollar

Czech National Bank preview: Last meeting before first rate cut The CNB is starting to discuss the possibility of cutting rates and we believe that conditions will allow the first cut as early as November. In any case, the board will want to stay on the cautious side, and the tone of the press conference will reflect that. However, the CNB has little to offer from its hawkish arsenal given that a cut is only a matter of time now.   The debate on rate cuts begins The Czech National Bank (CNB) will hold its monetary policy meeting next Wednesday, which we believe will be the last one before the vote on cutting rates. This time there will be no new central bank forecast and the board will only discuss an internal update on the situation. For now, it seems that the CNB is happy with the numbers coming out of the economy. Economic growth was slightly above expectations in the second quarter, on the other hand, wage growth and headline and core inflation are below the central bank's forecast. Only EUR/CZK is pointing in an inflationary direction with weakening after the August CNB meeting, and more recently after the National Bank of Poland's (NBP's) surprise decision (of a 75bp rate cut) in early September. However, the CNB was expecting this direction, and based on recent communication we believe FX is not a game-changer.   Board members have already indicated that the September meeting will be used to discuss the rate-cutting strategy, so we could see some details from this discussion. In any case, the CNB will try to sell future rate cuts with a hawkish and cautious tone. However, we doubt that the central bank has anything more to offer from its hawkish arsenal to the markets, especially in the context of the current shift in market expectations towards a later rate cut. Moreover, the central bank's recent moves – the end of the FX intervention regime and the easing of capital and mortgage requirements – indicate a dovish bias of the board.   First rate cut in November Our forecast remains unchanged – the first 25bp rate cut in November along with a new central bank forecast. Of course, the risks here are clear. The central bank could wait for the January inflation number and cut rates at the start of next year. However, we believe that the combination of faster-falling inflation, weak economic numbers and FX at current or stronger levels will be a reason for the board to cut rates in November and avoid too much monetary tightening and inflation near the target in January. Looking ahead, we don't expect there to be more than two 25bp rate cuts (in November and December) before the January inflation number is released (after the February meeting). Further down the line, however, we expect the CNB to gradually increase the pace of cuts if the numbers confirm inflation is near the 2% target.   What to expect in FX and rates markets In the FX market, the Czech koruna suffered a depreciation after the end of the CNB's exchange rate regime in August and the NBP's surprise rate cut in September. In particular, due to the spillover shock within the region in the last few weeks, we believe EUR/CZK should be lower and are slightly positive on the CZK. This should be supported by the CNB's cautious tone next week. Of course, EUR/CZK levels will play a key role in the November decision and we believe the pain threshold for the CNB to delay rate cuts until the first quarter of next year is 25.0 EUR/CZK. In the rates market, we see the pricing of rate cuts in the short term, within two years, as more or less fair. If anything, we see less chance of big rate cuts in the first quarter, as the market currently expects. On the other hand, we see the biggest mispricing at the long end of the curve, which has out-priced a CNB return to the 3% equilibrium rate level. Thus, the IRS curve now points to rates above 4% in the long term and we see room for downward repricing here once rate-cutting discussions begin next week. Czech government bond (CZGBs) yields have moved higher following the sell-off in core markets, which we believe opens up a good opportunity to benefit from a clearly positive outlook. On the supply side, MinFin is already limiting issuance as the year-end approaches and the better-than-expected state budget result. In addition, MinFin is now starting to frontload next year's needs through switches, confirming a comfortable situation with nearly 75% of the CZGBs plan covered. Thus, we see the current yield as attractive ahead of the materialisation of a massive supply drop next year and by far the best inflation profile in the CEE region followed by the CNB rate cuts. Thus, we like CZGBs both outright and in the spread versus the IRS curve, which should head into negative territory in the coming months, in our view.  

CEE: Turkey hiking rates again Today's calendar in the region is basically empty. Elsewhere today, we have a central bank meeting in Turkey. We expect another rate hike of 250bp to 37.5%, which is broadly in line with expectations, but surveys show a wider range of rate hikes. The latest inflation release in October showed the underlying trend starting to improve not only for the core rate but also the headline. Accordingly, we expect the bank to consider a slower hike. However, risks are on the upside given strong tightening moves since August. In FX, yesterday brought an unexpected turn in Czech rates. The market was heavily paid across the curve, more so than elsewhere in the CEE region. The rates move thus shot the interest rate differential up for once, erasing the potential for the CZK weakness we mentioned earlier. EUR/CZK responded by moving lower and back to 24.450. For now, this seems to match the rate move exactly. However, it is hard to say where rates will head today. Yesterday's statement from the Czech National Bank, released after the rate move, suggests that the discussion about waiting for January inflation continues. On the other hand, weak economic data and a stronger koruna are reasons for lower rates and bets on an earlier rate cut. Despite the timing of the first rate cut, we think the short end of the curve should be lower, leading the CZK to weaker levels. Thus, we remain negative on the currency.

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.

Borrowing needs will fall this year, meaning a lower supply of LCY bonds, but there is still a long way to go given the slow fiscal consolidation. Central and Eastern Europe should remain more active in the FX market than pre-Covid, while a busy January and the broadening of funding sources offer flexibility for the rest of the year Borrowing needs this year will be down on last year in the whole CEE region, with the exception of Poland. The decline is due to both lower budget deficits and redemptions. In contrast, in Poland, both have increased year-on-year. Overall, the supply of local currency bonds should fall but remain well above pre-Covid levels. Given lower yields, this supply may prove more difficult to place in the market compared to last year, which saw strong market demand despite record supply. This time is different, and we expect financial markets to be tougher and punish more budget overruns and additional issuance. Local currency issuance: Improvement but still a long way to go From a positioning perspective, we find the Romanian government bond (ROMGBs) market to be overcrowded after the significant inflows last year. On the other hand, the significantly underweight Polish government bond (POLGBs) market should help cover the historically record borrowing needs. Czech government bonds (CZGBs) and Hungarian government bonds (HGBs) remain somewhere in between with steady foreign inflows into the market. On the sovereign ratings side, all the obvious changes happened last year and should stabilise this year with only some adjustments in outlooks in the pipeline, unless a more significant shock arrives. On the local currency supply side, we see a clear improvement from last year in the Czech Republic, as it was a bright spot in the CEE region with credible public finance consolidation. In addition, we see it as the only country in the region with positive risks of a lower supply of CZGBs than the Ministry of Finance indicates. Hungary has also made great progress here, of course, with the traditional broad diversification of funding sources that should keep the pressure off the HGB market in the event of an overshoot of the projected deficit. In contrast, we see only a relatively small improvement in Romania, where the supply of ROMGBs will fall only a little. The supply of Polish government bonds, meanwhile, was already at a record-high last year and is set to rise a little more this year. In addition, the use of additional sources to avoid flooding the local currency bond market will increase significantly, which we believe represents the biggest challenge for the bond market in the CEE region this year.   FX issuance: Fast start and diverse funding sources offer flexibility On the FX side, CEE sovereigns are set to remain active in the Eurobond primary market in 2024 and beyond, with the overall trend driven by recent external shocks from Covid and surging energy prices, along with structural factors such as the energy transition in Europe. A key theme that unites regular issuers Romania, Poland, and Hungary is the diversification of funding sources, with more consistent interest in the US dollar, as well as alternative currencies such as the Japanese yen and Chinese yuan, alongside the more traditional euro for the region. The growing green bond market is also an area of focus, with Hungary leading the way, and Romania set to follow this year. At the same time, 2024 should see some divergence, with Poland taking the lead in the region for Eurobond issuance and set to be one of the largest EM sovereign issuers globally this year. Hungary should see a slight reduction in Eurobond supply compared to recent years, with its strategy of diversifying funding sources and front-loading supply providing plenty of flexibility for the rest of the year. Romania should retain its position as a regular issuer, although net supply will be lower this year, while catching up with Poland and Hungary in terms of diverse funding sources via green issuance and alternative currencies. A strong start to the year, with almost $15bn in issuance for CEE in January so far, should mean less pressure on the region to issue later in the year if market conditions turn.  

CEE: Busy political scene in the region A busy week in the region comes to an end after a hawkish National Bank of Hungary surprise on Tuesday, another conflict between the president and the government in Poland on Wednesday and an agreement with Hungary at the EU summit yesterday. However, we can at least take some risk events off the table. Next week we will see central bank meetings in Poland and the Czech Republic and the first January inflation in the CEE region in Hungary. So markets should return to the normal agenda and regain their footing. Following the EU summit chapter, the market in Hungary has started to price in rate cuts again as expected, and we think that with the inflation print next week the market will fully switch into rate-cutting mode again. Therefore, it is hard for us to be positive on the HUF at these levels as we discussed here earlier. In fact, we prefer PLN here, which seems to have become used to the political noise and has grown more resilient. Moreover, it remains the only currency supported by rates. On both sides, we think the gains have gone too far, but in the case of PLN it is not that hard to imagine an improving interest rate differential due to falling core rates supporting FX. The same cannot be said in the case of HUF.