Central and Eastern European assets underperformed in October as CE3 FX carry against the EUR and USD lagged cash returns, reflecting expectations that regional central banks will not track the policy paths of the ECB and the Fed. An equally weighted carry basket of CZK, HUF and PLN versus the EUR and USD was just below a 1% year-to-date gain, yet it sat close to 2.5pp behind the cash equivalent. The EUR has been pressured in recent weeks by sovereign risk, while tighter financial conditions have not shifted the ECB from its current trajectory.
Relative Performance of FX Carry and Regional Central Bank Policy
Central and Eastern European assets underperformed in October as CE3 FX carry against the EUR and USD lagged cash returns, reflecting expectations that regional central banks will not track the policy paths of the ECB and the Fed. An equally weighted carry basket of CZK, HUF and PLN versus the EUR and USD was just below a 1% year-to-date gain, yet it sat close to 2.5pp behind the cash equivalent. The EUR has been pressured in recent weeks by sovereign risk, while tighter financial conditions have not shifted the ECB from its current trajectory.
Stability in Fixed Income and Risks to Deficits
CEE fixed income showed more stability, with real rates described as supportive for duration, and an issuance-weighted total return basket for CEE bonds continuing to recover despite tougher conditions for credit and similarly rated emerging-market sovereigns. With yield curves steepening, CEE central banks may keep rates steady, leaving currencies to absorb adjustment. Upside risks to deficits were linked to persistently high borrowing costs and the potential need for additional winter energy support amid global supply challenges, while any Eurozone risk premia could be amplified for CEE and weigh on performance versus the USD, CHF and other safe havens.
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