Central European currencies extended their rally yesterday as positive sentiment related to the ECB repo tender has spilled over to the region. In this respect it is worth to note that performance of the Hungarian forint and the Polish zloty is closely correlated with sovereign credit premiums of the respective countries. So, while for instance 5Y CDS spreads for Hungary and Poland have declined by more than 100 bps since the beginning of the year 2012, the forint and the zloty were able to post 9% gains against the euro in the same period.
We believe that an increasing popularity of carry trades could be behind the recent rally. The attractiveness of such trade strategies could be explained not only by relatively high interest rates in Hungary and Poland but also by falling Euribor rates which have almost slipped to an all-time lows (for instance onemonth Euribor has fallen to 0.54%).