Risk-On Sentiment and Currency Rebound
We are seeing markets switch back into a risk-on mood as news of a potential US-Iran de-escalation circulates. This has allowed currencies like the zloty and forint to regain ground after recent weakness. While Brent crude has dipped about 7% this past week to around $88, this drop isn’t yet significant enough to alter central banks’ inflation concerns.Diverging Central Bank Policies and Trading Strategies
For the Czech koruna, we believe the path is already set for a rate hike next week. Recent inflation data showing a 3.1% year-over-year figure for May keeps the pressure on the Czech National Bank to act. This divergence suggests traders could look at call options on the koruna or strategies that profit from rising Czech short-term interest rates. In Hungary, the story is different as we anticipate a rate cut from the National Bank of Hungary in two weeks. Our baseline is a 25 basis point cut, but a larger 50 basis point move is possible if continued risk-on sentiment pushes the EUR/HUF exchange rate down towards the 350 level. This uncertainty about the size of the cut creates an opportunity for traders using volatility strategies, like straddles, on the forint. This clear policy divergence between a hiking Czech National Bank and an easing National Bank of Hungary presents a compelling regional trade. We are positioning for this by favoring the koruna against the forint (long CZK/HUF) in the coming weeks. This type of divergence play has historically performed well during periods of shifting central bank cycles.Start trading now — click here to create your real VT Markets account.
