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Central and Eastern European currencies are reversing the trend

The United States has been withdrawing capital from all over the world in recent weeks. Low domestic unemployment and slowing core inflation support the Fed officials’ talk that interest rates will remain at the current level of 5.00-5.25% for a long time. US bond yields are rising and today’s exchange rates offer a more interesting risk-to-risk ratio than Czech, Polish or Hungarian notes.

It is therefore not surprising that the Czech koruna started losing ground from its strong above-average levels against both the dollar and the euro. Low domestic inflation figures in the spring will tame the hawks in the Chinese central bank and, on the contrary, will boost speculation about interest rate cuts at the end of this year. Bond investors expect this direction of monetary policy and reduce the yield on the Czech 10-year debt to 4.45% per annum, compared to 3.70% per annum, this increase is no longer sufficient to cover the risk premium.

Evolution of the currency pair USD / CZK (4 hours chart – H4):

Interest rates in Poland are lower than in the Czech Republic, only 6.75%. Compared to ours, the Polish economy is expanding faster, and it seems that even inflation will be more stable in our northern neighbours. However, the currency markets did not see any further interest rate hike by the Polish Central Bank to support the zloty.

The initial euphoria from falling energy prices and optimistic sentiments seems to have worn off. The Polish Zloty is currently very strong against the Euro, although inflation is devaluing the currency faster than it is in the Eurozone. Warsaw’s planned high budget deficit due to the increase in arms spending also does not fit into the mosaic of the steadily growing East European tiger, in which foreign investors are willing to deposit their undervalued capital.

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Evolution of the currency pair EUR / PLN (4 hours chart – H4):

Third, Hungary as the black sheep of the Central and Eastern European region. The populist experiences of Orbán’s government show themselves in their nakedness. After increasing government spending before last year’s election, restricting the prices of select food and fuels, and subsidizing mortgages, the result is 25 percent inflation, a rate that doesn’t come down much. This is why Hungary trampled on an exception to buy Russian oil at a deep discount.

It is therefore surprising that the Hungarian forint continues to hold its value against the euro. A cut in European subsidies due to the non-collective approach of the Hungarian government could mean a loss of units above the billions of euros that Budapest needs to finance its foreign deficit. True, the Hungarian Central Bank (MNB) intervened and dramatically increased the overnight lending rate to 20.5%, while the benchmark repo rate remained at 13%.

From this point of view, it is expensive to buy the EUR/HUF and USD/HUF currency pairs to hold them for the long term. However, given the accumulated sharp rise in prices (20-30 percent above the Eurozone in the past two years), it is very likely that the forint will weaken sooner or later. The reason may be the outbreak of (another) currency crisis in Turkey, where, after the end of the presidential elections, it is expected that the Turkish lira’s anchor on the dollar will vanish and weaken by tens of percent. The Hungarian forint is certainly driven by the risk aversion of Eastern European currencies, and the zloty and koruna are likely to join in as well.

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Evolution of the EUR / HUF currency pair (4-hour chart – H4):

Tomasz Rabuta
Analytical team

Sources: MT4, CNB, NBP, MNB