CZK Remains The ‘Safest’ Currency in CEE Based on Level of FX Reserves

• We recently mentioned that the change in the CNB board composition (perceived to be much more ‘dovish’) could start to weigh on the domestic currency in the medium term as we could see a pause (or end) in the tightening cycle following the June 22 meeting.
• However, investors have also turned their attention to the level of FX reserves in the CEE region since the start of the war to see which country is the most (and least) vulnerable to the geopolitical uncertainty.
• Czech Republic has historically been known to be one of the countries with the highest level of FX reserves.
• They are currently estimated to be at 70% of the country’s GDP, far above the EM range of 20%/40%.
• One interesting measure that analysts have followed over time has been the number of months of imports covered by foreign reserves.
• While the chart below (source: Bloomberg/ CEE central banks) shows that Czech Republic could cover over a year of imports (by FX reserves), Hungary is the most vulnerable country among the CEE region, with total reserves covering less than 4 months of imports.
• Hence, volatility in CZK and Czech risky assets should be lower than in other CEE countries (particularly Hungary) as market uncertainty (related to Ukraine war) remains elevated.

Source: Bloomberg/MNI