CEE currencies have been hit hard since corona crisis emerged, depreciating more than 10.0% in some countries. Central banks were trying to ease their politics, decreasing interest rates, and starting QE while investors cut their exposure to EM. However, equity markets are recovering faster than most of market participants expected and some of them now think CEE currencies being undervalued. In this short article you can read short history of their performance, monetary policy in these countries and what we could expect next.
At the beginning of today’s blog, we want to highlight that most of EM currencies, such as CZK, HUF and PLN are trading with almost perfect correlation in times of strong foreign shocks as we have seen in the last two months. As you can see on the chart submitted below, all mentioned currencies followed move of large ETFs that are trading EM local currencies world-wide very closely. On the other hand, there are some currencies such as HRK and RON which are tied to EUR stronger due to central banks politics, so moves were rather muted.
Source: Bloomberg, InterCapital
We start with our neighbors, Hungarians, which currency have seen strong depreciation trend during crisis but also bounced back significantly as central bank made right moves. Namely, in February 2020 EURHUF was trading in 330 – 340 range, forint was constantly depreciating due to macroeconomic factors and very loose monetary policy. Nevertheless, in the end of March depreciation accelerated and EURHUF reached 370, reflecting strong outflow from EM funds. As interest rates were already low in Hungary and they started with QE before, they decided to step up on QE to limit long term rates while increasing short term rates to limit HUF depreciation. QE was not utilized in full while long term rates decreased significantly, and forint appreciated to 350 levels meaning that central bank was quite successful. In case economy shows signs of weakness (more than CB expects) we see rates decreasing in the next few months probable, so we see appreciation of forint limited in the short term.
Czech koruna has seen even larger move from February to peak of crisis. CZK was appreciating versus EUR constantly due to hawkish central bank that hiked rates in February to 2.25% and was the only bank in CEE to do such thing in 2020. EURCZK breached level of 24.80 back then but skyrocketed to almost 28.0 in the end of March, reflecting depreciation of almost 13.0%. CNB had lot of space to react so they cut their rates to 0.5%, resulting in solid yield decrease although they are still resisting from implementing asset purchases which makes its bank almost unique. Since peak of the crisis, CZK appreciated only 3.0% despite strong risk-on environment and we see two main factors. First is large involvement of foreign investors in Czech assets (due to FX peg) which were exiting from the position while the second one could be large cut of interest rates which decreased attractiveness of holding CZK. We do not expect EURCZK to move in any direction strongly, but in case of second shock we could see even faster jumps and breaching of 28.0 level.
Polish zloty did not have such a magnificent move but still depreciated almost 10.0% from down to peak. As it was the case in Czechia, Polish central banks had some space to react, but they also employed large QE programme. Looking at the chart, seems like EURPLN is trading almost perfectly with large EM local currency funds and we expect it to continue so, as PLN has the largest weight in these funds among currencies above mentioned. With high equity beta, we have witnessed strong appreciation this week with PLN coming towards 4.40 levels.
On the other hand, Romanian Leu does not have many correlations with any of foreign assets. Anyone who was trading or only watching their currencies knows that for a long time. Central bank is limiting depreciation of domestic currency and it cut its rates only mildly, by 50bps. Interesting to mention is that in the beginning of April we have seen forward points on EURRON jumping to above 10.0% which helped currency staying close to current levels.