Czech Republic

The Koruna is heading towards EURCZK 28.80


Hungary

As the forint weakens, the bond market gives back all the weekly gains


Poland

Weakening economy set to fuel more aggressive rate cuts from the NBP...


The Week Ahead

NBP will continue with its aggressive easing campaign


Overview

Central Europe underperforms other emerging markets

Central Europe was again heavily sold by FX investors, with the sell-off triggered by multiple factors like the unfortunate comment from a MNB Deputy Governor, who, after having the guts to cut the base rate by another 50 bps, stated that the bank was not concerned by the depreciation of the currency, but also by the mixed result of the Polish euro bond auction. Evaluating the recent sell-off in the region, we should note that not only currencies, bonds, and stocks are falling now that risk aversion has increased, but more importantly, Central European assets are even falling relative to the other emerging markets.

The sell-off in Central Europe really looks like the contagion that occurred in Asia or Latin America years ago in similar situations. Following the herd, markets do not distinguish between individual countries, and thus we cannot wonder that the CZK, the HUF, and the Polish zloty have all come under pressure. Not only investors fail to distinguish between the fundamentals of the individual economies, they even seem to underestimate the possibilities for economic policy makers to react to the new situation. It is true that the policy alternatives of the Hungarian central bank and government are very limited; yet, on the other hand, Polish, and particularly Czech official authorities have instruments at hand to curb the selloff. However, they will only fight the depreciation when they feel that their inflation target is compromised, which is apparently not the case yet. However, should the zloty and the koruna continue to weaken at the current pace, the pain threshold (on inflation) will be reached soon, convincing the central banks to stop their expansive policy, which threatens the currencies.