CE currencies still enjoy liquidity-driven rally

The hundreds of billions of euros that the ECB has released into the European banking system have been increasingly evident on financial markets. In addition to the dramatic drop in the sovereign credit spreads of key (vulnerable) countries of the eurozone, such as Italy and Spain, the cheap money from the ECB has likely also reached Central Europe’s forex markets too.

Thus, Central European currencies, including the koruna, have fared really well recently. This is particularly evident with the Polish zloty and the Hungarian forint, as both currencies have strengthened against the euro by approximately 9% since the beginning of the year.

The question is how long the rally of Central European currencies, driven by available liquidity, may persist. It is quite possible that the upbeat sentiment on Central European markets may continue to last for a few days or weeks. On the other hand, a negative correction may occur very soon. Those who currently bet on carry trades (with Central European currencies) have to take into account that the leading central banks, such as the ECB and the Fed, have indicated to markets that another expansion (beyond the scope of the existing one) will not occur soon. And thus the risky positions (including forex carry trades) cannot rely on another prompt (monetary) intervention, which might neutralise a release of surprisingly unfavourable information, if any, from the periphery of the eurozone.

As concern this week – regional highlights could become the NBP interest-rate setting meeting (on Wednesday), the Czech government bond auction (on Wednesday) and a release of the February inflation figure for the Czech econemy (on Friday).