Koruna is likeliest in Central Europe to rise further

Subject

The rally in Central Europe’s currencies despite the dovish stance of most of the region’s central banks.

Significance

The zloty has shot up against the euro this year; the koruna has strengthened sharply in response to the removal by the Czech National Bank (CNB) of its euro rate cap; even the forint has firmed by 2.2% against the euro since mid-December. Central Europe’s currencies are benefiting from reflationary pressures (particularly in the Czech Republic), inflows into equity and local bond markets, and positive sentiment towards developing economies.

Impacts

• The 40-bp fall in 10-year US Treasury yields since mid-March will buoy world equity markets and encourage more exposure to EM ‘risk assets’.
• The 6% fall in the dollar index against a basket of currencies since early January is contributing to sharp euro and yen rises.
• Germany’s economy is performing strongly, in the first quarter enjoying its fastest growth rate in a year.
• This is underpinning expansion in Central Europe’s economies, particularly in Hungary and the Czech Republic.