CEE FX: Normalising rates leave room for gains – ING

ING’s Frantisek Taborsky notes Central and Eastern European (CEE) rate curves have repriced sharply, with more tightening now expected in Czech Republic and Poland and further easing in Hungary. He still sees mispricing versus Taborsky forecasts and expects selected CEE currencies, notably the Polish Zloty (PLN) and Hungarian Forint (HUF), to strengthen, targeting EUR/PLN below 4.300 and EUR/HUF below 358, while seeing EUR/CZK moving above 24.200.

Zloty and Forint seen outperforming peers

"The region saw a sharp recovery in rates yesterday, although this did not fully carry through to FX. Implied rate paths moved meaningfully, now pricing around 60bp of tightening in the Czech Republic and 40bp in Poland, alongside 50bp of easing in Hungary over an 18-month horizon. In the past two sessions alone, curves have shifted by roughly 15-30bp across the region."

"We still see material mispricing versus our forecasts, but market pricing is moving back into a plausible scenario range. We expect this normalisation to continue this week unless the US-Iran conflict re-escalates and oil prices rise further."

"Rates and FX have diverged sharply over the past two weeks. The rates rally and the reduced rate-hike premium are not supportive for FX, but given the current gaps and the recent lag in FX versus rates, we still see room for selected currencies to strengthen."

"We therefore continue to expect gains in the zloty and forint despite narrower rate differentials, with EUR/PLN moving below 4.300 and EUR/HUF below 358. By contrast, EUR/CZK does not benefit from the same dynamic and has closely tracked rates; we instead see scope for a move above 24.200. We also expect more dovish Czech National Bank comments this week, which could further support EUR/CZK upside."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)