CEE: Signs of recovery – Commerzbank

All three CE3 currencies had suffered heavy drops during the risk off move in recent weeks. The most volatile among these – the Hungarian forint – breached the key 400 level versus the euro, while the Polish zloty rose from around 4.27 a week ago to 4.31 at the end of last week. All three currencies now appear to be stabilising, or even recovering, as the risk spike is fading – EUR/HUF has descended below 400 – one significant indication that the risk spike could be fading was the renewed fall in the oil price, Commerzbank’s FX analyst Tatha Ghose notes.

Koruna possesses the lowest beta among the CE3 currencies

“Today, we take a look from the point of view of the Czech koruna. The koruna possesses the lowest beta among the CE3 currencies and hence, may be expected to decline the least as a result of a common market fall. We see in the left-hand figure below that this was indeed the case – the koruna fell the least. At the same time, the chart confirms the correlated nature of the move, overall. This also means that the koruna will rebound probably the least as the market further rallies.”

“Another interesting analysis agrees with this conclusion. In the right-hand side figure below, we plot a rolling beta for the EUR/CZK exchange rate. The indicator measures the proportion of variation in the EUR/CZK exchange rate which can be explained by a regression against a basket of peers. This calculation is carried out using a rolling window, which therefore produces the plotted indicator and not just one static number.”

“During major global developments, such as after covid in 2020, the indicator naturally rose to high levels. This indicator has risen recently, but not to the high levels seen during major upheavals. For the koruna, it stands at just around 0.2, which represents mild sensitivity to global forces. This is good news from the point of view of risk. On the one hand, this limits the koruna’s upside in the event of continued recovery. We forecast EUR/CZK to return gradually towards 25.15 level over the coming quarter.”