CEE – outperformance overlooked
Central and eastern European FX is not often discussed in financial media. Without commanding regional forces, their collective values are often the product of wider market forces. This week, the world has continued to pay attention to the ongoing negotiations amongst world leaders regarding a deal for peace between Russia and Ukraine. These negotiations have evolved from last week’s meeting in Alaska between the US and Russia to now involve an active role for Europe. The idea of European military guarantee at a supranational level is something that has never been credibly discussed before and one that will have massive consequences, including for markets, if realised.
Despite the intense focus on such negotiations, it is fair to say that onlookers to these talks will so far be left somewhat disappointed. There has been lacklustre progress in such negotiations, and a ceasefire still seems a long way off if indeed it is possible at all at this time. Despite that lack of progress, central and eastern European currencies have continued to hold onto their recent strength. There are two main drivers of this strength. Firstly, a strong risk appetite amongst investors means that higher yield currencies continue to benefit from the carry trade, particularly whilst a bias towards monetary easing is growing amongst the G10. Secondly, the prospect of a ceasefire in Ukraine is a net positive for the region economically, prompting the buying of local currencies.
Whilst not considered within the basket of CEE FX, the Swiss Franc advanced versus the Euro yesterday in a possible sign that optimism for a ceasefire may be fading. Given this early move in CHF, there is the potential that minor European currencies struggle to maintain their current strength. The performance of such currencies is most often measured against the Euro. Euro traders today will be analysing how the PMIs released this morning will impact the prospect for one more rate cut in 2025. As the Jackson Hole Symposium kicks off today, there is always the chance for unexpected market movement as monetary and financial persuasions are discussed more openly. The main event here however will not take place until tomorrow when we heard from Fed Chair, Jay Powell.
Discussion and Analysis by Charles Porter
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