Our conclusion is that, over recent years, the short-term fluctuations of CEE4 currencies have been driven predominantly by global factors, but medium-term trends have been strongly related to local fundamentals. In the current environment of elevated economic uncertainty and high inflation, this implies that economic policy affecting the fiscal position, the current account balance and inflation exerts a sizeable impact on the value of CEE4 currencies.
Looking at the currencies case by case, it seems the Czech economy can afford the relative strength of CZK, though there might be signs of hot capital inflows playing a part in the recent appreciation. HUF weakness seems to reflect the macro fundamentals as well as the idiosyncratic risk premium and serve as a mechanism of maintaining competitiveness. By that logic, RON seems to be overvalued relative to its macro fundamentals, with weaker levels prevented by a more active central bank involvement on the FX market. At the same time, Romania is tactically benefitting from the stronger RON given lower imported inflation, and avoids higher financial costs related to the elevated share of FX public debt. Lastly, Poland’s fundamentals seem to be structurally closer to Czech fundamentals, but may have higher vulnerability to internal and international politics in the region.
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