CEE FX: Regional currencies weaken against Euro on policy risks - Societe Generale

Societe Generale reports that Central and Eastern European currencies, such as the Hungarian Forint, will depreciate by roughly 3% against the Euro this week, as the EUR/USD exchange rate falls below 1.14. The Hungarian central bank maintained its interest rate at 5.50% and reduced the inflation target to 2.5% for 2028, in line with the nation's goal to adopt the Euro by 2030. This hawkish stance briefly pushed EUR/HUF to its 100-day moving average and increased 10-year HUFGB yields by 11 basis points to 5.87%.

Poland's currency, the Polish Zloty, briefly surpassed 4.40 against the Euro for the first time in two years after Moody's lowered its credit rating to A3 with a negative outlook. This downgrade was attributed to fiscal deterioration, significant deficits, and rising debt. Additionally, Poland experienced a 42-second violation of Russian helicopter airspace, shortly after the prime minister warned that Russia was planning attacks on NATO allies.

The Czech Crown (CZK) yield is approaching its 4-year high of 5.40% following the approval of a CZK386bn budget deficit for 2027, the second-largest on record. The government reintroduced fuel price regulation and temporarily reduced a diesel excise tax for October. The Romanian Leu (RON) strengthened above 5.27, causing the 10-year RONGB yield to exceed 7.45%.

The pressure to potentially downgrade to junk status due to political deadlock has intensified, leading to S&P's possible review of the rating in late October or early November.

The Australian Dollar (AUD) hit a fresh low since early August during the Asian session and is vulnerable near 0.7000 after breaking below the 200-day Simple Moving Average overnight. This decline occurred amid the hawkish Federal Reserve stance, a two-day rally in oil prices, and rising inflation concerns, which are pushing US bond yields to multi-year highs.

Geopolitical risks are also contributing to the strengthening of the US Dollar, surpassing a two-month high, and overshadowing Reserve Bank of Australia rate hike expectations. This, in turn, weighs on the AUD. Meanwhile, USD/JPY declined during the Asian session, stalling its recent strong move to a three-week high of 159.00 as Japanese Yen bears become more cautious due to intervention fears.