The recent outperformance of the Polish zloty, Czech koruna and Hungarian forint reflects the impact of domestic monetary policy and eurozone risk conditions on these currencies.
“CE3 FX is more sensitive to the euro and to eurozone rates and less sensitive than other emerging-market FX to the kind of broader currency moves and readjustment in US Federal Reserve easing expectations that impacted markets in August, for example,” says Nicholas Rees, senior FX market analyst at Monex.
Within that group of currencies, the forint is known for its higher volatility compared with the zloty and koruna. During periods of global financial stress – such as the unwinding of yen carry trades – currencies with higher perceived risk tend to experience more dramatic sell-offs.
“Hungary’s economy and currency are more sensitive to shifts in global investor sentiment since the country has a smaller economic base compared to Poland and relies heavily on external funding and exports,” explains VT Markets senior market analyst, Apac, Justin Khoo.
During the yen carry trade unwind, this sensitivity translated into big outflows as global risk aversion increased.
Early fall
David Morrison, senior market analyst at Trade Nation, notes that most of the carry trade unwind came in the first four months of the year, during which time the forint fell 9% against the dollar, the zloty lost 6%, the koruna fell 7% and the Romanian leu declined 5%.
Hungary’s interest rate fell from 10.75% to 7.75% between December 2023 and April 2024, while the Fed was stuck at 5.5% despite speculation that rates were set to fall sharply, with the first cut forecast for March.
Unwinding of the carry trade caused the dollar to fall rather than rise in the second half of July and the early part of August. In this context the currencies of eastern European countries gained against the dollar, although they lost ground against the yen and the Swiss franc.
The exception was the Ukrainian hryvnia, which has been under constant pressure and has fallen as far as the policy of the central bank and the country’s ministry of finance will allow.
Alexey Efimov, market analyst at Alpari, observes that the forint gained the most of all the main central and eastern European currencies amid the unwinding of the yen carry trade in early August. The forint climbed 0.6% against the dollar on August 5, ranking it among the top 10 currencies that saw the biggest one-day advance versus the greenback.
eToro analyst Pawel Majtkowski says the carry trade is largely responsible for keeping the Polish currency below 4.30 to the euro.
“This type of trade was – and is – possible because interest rates in Poland remain at 5.75%,” he says. “The president of the central bank has previously communicated that a rate cut will not take place until 2026 at the earliest, although recently he hinted for the first time that a rate cut could come as early as next year.”
ING analysts also refer to the relative resilience of the zloty, which has been boosted by limited speculative positioning since the emerging market sell-off in June. They believe neutral positioning in the forint market helped the Hungarian currency escape the worst effects of the global turmoil caused by ‘manic Monday’ on August 5, when weak economic data from the US, Japan’s interest rate hike and concerns over tech stock valuations combined to prompt a global market sell-off.
Liquid dollar
It is worth noting that carry trades require an appropriate level of liquidity, which is why they are most common in the region’s most liquid currencies.
The fact that we saw a decline in the dollar against eastern European currencies from July to the second half of August leads us to look for a reason in the dollar itself and more specifically, expectations of a change in monetary policy, says Alexander Kuptsikevich, senior market research analyst at FXPro.
“Historically, currency markets focus first on the turning points in US monetary policy and only then on macroeconomics and trends in competing currencies,” he explains. “In the following months, attention returns to internal fundamental factors. This is usually a longer period that has not yet begun, but it is never too late to identify important differences in the fundamentals of countries that can explain outperformance or underperformance.”
