CEE: The region remains on edge
The ECB's decision did not turn out as badly for the region as we feared though the situation remains precarious. We think that EUR/USD downside risks persist despite the larger-than-expected hike by the ECB. The most vulnerable at the moment, in our view, is the Polish zloty, which has lost 55-65bp at the short end of the IRS curve over the last few days, taking the interest rate differential back to mid-April levels. We believe that sooner or later, the zloty will have to reflect such a shift in its value and return at least back to 4.80 EUR/PLN and, moreover, the market still has room to reduce its bets on further NBP monetary tightening.
Second in line in our view is the Hungarian forint, which, although firmly supported by the highest interest rate differential in the region, faces an uncertain geopolitical situation. Although the latest news from the Hungarian government on negotiations with the EU looks optimistic, we think it is too early to find an agreement. At the same time, Hungary is the most vulnerable country to a potential stoppage of gas supplies from Russia, which the Hungarian government is addressing in Moscow, and will certainly not help in negotiations with Brussels. On top of that, the Fitch rating review will be published today, and we believe there is a strong chance of an outlook downgrade. Overall, we thus believe that the forint is enjoying its moment of glory, but could go back above 400 EUR/HUF very quickly.
The Czech koruna tested the 24.60 EUR/CZK level for the first time in 10 days, which may have triggered the central bank intervention and is likely to be repeated in the coming days. Expectations for further CNB rate hikes are fading and negative comments by some board members regarding FX tools may attract more short positions with a view to ending intervention soon. However, we believe that for the time being, the Czech National Bank has little reason to change its current approach and this issue will be back on the table after the August meeting.