Negative sentiment on global markets triggered a correction in the CEE region. The Polish and Hungarian currencies weakened about 1% on the day as investors reduced their position to lower the risk exposure. On the fundamental front, there were Polish data releases.
Inflation for September surprised to the downside as it dropped below 4 %Y/Y - the main reason was unexpected decrease in food and non-alcoholic beverages prices. Regarding the current account balance reading, it showed a wider than expected deficit in August (-1.7 bn eur vs. expected -1.4 bn eur). The main driver was even higher deficit of balance of income than in the previous month (- 1.67 bn eur vs -1.53 bn eur).
After this data, regional inflation outlook looks to be benign, which may allow central banks to tolerate the current exchange rate weakness for longer. This is especially clear in Hungary, where the market priced in more than 100bps rate hike a week-ago, which has been scaled back to 40-50bps in recent days.
We think that volatility will probably have to decline over the next days before investors’ appetite return for the CEE exposure.