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Disorderly Central European asset sell-off is unlikely

Thursday, May 25, 2017

Significance

With inflation rates rising and speculation mounting about the timing of the ECB’s own exit from its programme of quantitative easing (QE), last month’s decision by the Czech National Bank (CNB) to remove its three-and-a-half-year upper limit on the koruna’s euro exchange rate marks the beginning of a shift away from ultra-loose monetary policies in Central Europe. ‘Reflation trade’ could become more pronounced, if core inflation -- which is still subdued in Poland -- rises more sharply and the ECB hints at an exit strategy from QE.

Impacts

  • Robust economic data in the euro-area and diminishing political risk have helped the euro/dollar rate surge by 6% since mid-April.
  • There is growing confidence that OPEC will prolong its production-cut agreement, with oil prices shooting up by nearly 10% since early May.
  • Mounting political risks in Washington are withering the "Trump trade”, an important component of the global reflation trade.
  • There are also doubts about Trump’s ability to implement pro-growth policies in the United States.
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