Under the interest rate hike cycle of the world's major economies led by the Federal Reserve, the currencies of emerging market economies are usually under pressure. In previous cycles, the Turkish lira, the South African rand, and the Mexican peso have been among the top losers.

 

But this time around, foreign exchange traders are now more bearish on the Hungarian forint, the Polish zloty and the Czech koruna than any other emerging markets except the Russian ruble and Turkish lira, according to a foreign media survey, due to the troubles facing the euro zone itself. market economy currency.

 

Goldman Sachs, Fidelity International and InTouch Capital Markets also believe that after already suffering from the escalation of the situation in Russia and Ukraine, the major currencies of Eastern Europe are about to suffer from the recession in the euro zone and the depreciation of the euro. Another blow. If the euro falls below parity against the dollar, the magnitude of the depreciation of major Eastern European currencies will lead the declines in emerging market economies.

 

Paul Greer, a London-based fund manager at Fidelity International, said he's betting those eastern European currencies will fall further against the dollar because they are particularly vulnerable to euro volatility, which is roughly 60% of exports are traded in euros. The three currencies have also moved more and more in sync with the euro since the Russian-Ukrainian conflict escalated in February. "We are cautious and negative on Eastern European currencies, which are the most vulnerable of all emerging market currencies," he said.

 

 

Dragged down by the risk of recession in the euro zone

 

The International Monetary Fund (IMF) warned in July that the global economy could soon slip into recession, with the outlook for the euro zone looking particularly grim, with record-breaking inflation and a heightened likelihood of Russian energy supply disruptions that could dent leading to a recession in the euro zone economy.

 

The currencies of the three Eastern European countries are among the currencies most affected by the Russian-Ukrainian conflict and the risk of recession in the euro zone this year. Since the upgrade at the end of February this year, the forint has depreciated 17% against the dollar and 8.2% against the euro; the zloty has lost 12% against the dollar; the krona has lost 9.6% of its value against the dollar.

 

In the future, the risk of recession in the euro area may further drag down the currencies of these three countries.

 

The previously announced second-quarter gross domestic product (GDP) in the euro zone unexpectedly accelerated month-on-month and exceeded expectations, but the German economy, the “locomotive” of the euro zone’s economy, recorded zero growth in the second quarter and was on the verge of recession. In addition, the euro zone economic sentiment index fell to its lowest level since March last year in July, and consumer confidence also hit a record low.

 

Christian Keller, head of economic research at Barclays Bank, told Yicai Global that the drivers of the euro zone's second-quarter growth were the Purchasing Managers' Index (PMI) in July, extremely high and persistent inflation in the confidence index, credit The sharp tightening of conditions - all point to a contraction of economic activity in the euro area after the summer, the specific depth of the recession is closely related to the situation in Russia and Ukraine and the delivery of Russian gas to Europe. 

 

"While EU countries have agreed to voluntarily reduce gas consumption and reserve gas for winter, with Russia cutting gas supplies again recently, it is clear that there is still some level of rationing risk in the euro zone this winter," Keller said. Our base case forecast is for gas prices to rise and real GDP to fall by around 1% in the euro area over the next 12 months, and anything that could limit production levels in the euro area could reduce real GDP even more.”

 

Mateuz Urban, an economist at Oxford Economics, also said that given weakening demand, deteriorating market sentiment and the growing likelihood of gas rationing starting in the winter, the euro zone economy is expected to reach its peak by the end of the year. into a recession around the beginning of next year.

 

Jordan Rochester, an analyst at Nomura Securities, said: "Energy supply risks appear to be growing in Germany and some other European countries, and European electricity prices have reached record highs, although this has not pushed the euro further lower against the dollar. But in our view, it's only a matter of time." In the opinion of many investment bankers, a weak euro will further exacerbate rising energy prices in Europe and imported inflationary pressures. High energy prices will push the euro zone economy into recession, even if there are no natural gas outages in key European countries.

 

Future prospects depend on the euro

 

In addition to the economic outlook, the trend of the euro also determines the trend of these three Eastern European currencies. These currencies are increasingly linked to the euro. All three currencies are currently negatively correlated with the euro at around -0.8, and if a currency has a negative correlation with the euro of -1, it means that this currency will have a negative correlation with the euro. The pace is exactly the same.

 

At present, the Hungarian government has quickly tightened monetary policy to help the forint against the euro temporarily stabilize after falling to a record low in July. But Hungary has yet to receive funding from the EU's pandemic recovery fund, also putting pressure on Forint. In Poland, where the government has made more progress in talks with the European Union to secure funding for coronavirus recovery, the central bank's monetary tightening cycle is coming to an end, with its key interest rate at 6.5%, lower than Hungary's 10.75%. 

 

The Czech koruna is the most stable of the three currencies because of foreign exchange intervention by the Czech central bank. The Czech central bank kept its key interest rate unchanged at 7% in its latest interest rate decision, with newly appointed Czech central bank governor Ales Michl supporting an end to aggressive monetary tightening plans.

 

In any case, if the euro falls further below parity against the dollar, the three Eastern European currencies mentioned above may not escape the fate of leading emerging market currencies to fall. At the time of the press deadline of the first financial reporter at noon today, the euro against the dollar was at 1.0195, just one step away from falling below parity again.

 

Given that eastern European currencies are already at risk of disruptions to gas supplies in the euro zone, if the euro continues to fall below parity against the dollar, these currencies could record the biggest declines among emerging market currencies, Goldman's team of strategists said in a report. At the end of July, Goldman Sachs had lowered its three-month euro target from $1.05 to $0.99.

 

Piotr Matys, senior currency analyst at InTouch Capital Markets, also said: "The euro area as a whole is more vulnerable at this stage (than in the past), so it is reasonable to assume that Eastern European currencies will underperform, especially if the euro continues to depreciate. ."

 

Oliver Harvey, head of currency research at Deutsche Bank Central, Eastern Europe, Middle East, Africa and Latin America, said, "If the euro falls below parity against the dollar, it will be mainly due to the further deterioration of the Russian-Ukrainian conflict and the spillover effect on the euro area economy. As a result, the currencies of the three Eastern European countries are bound to underperform.

 

" But he added that the currency trends of these three countries are also divided into good and bad, and the fall of the forint has basically digested the concern about the Hungarian economy; although the Krona's previous decline was smaller than the forint And the zloty, but the Czech central bank may slow down foreign exchange intervention next, coupled with the loss of Czech economic competitiveness, the krona may make up for the decline, lagging behind the forint and the zloty.