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Selling Pressure Remains Elevated Despite Aggressive Tightening

CEE FX
  • An interesting observation in the CEE region is that despite the aggressive hikes from central banks, CEE currencies have remained 'weak' against the USD, which indicates that the dollar momentum remains firm.
  • In addition, demand for the greenback could continue to grow if the Fed accelerates its tapering to start hiking rates in mid 2022.
  • Recession risk has been rising in the EM world with the sharp flattening of the yield curves, which could also continue to support USD in the medium term.
  • Hence, the CEE central banks are currently in a difficult position: strong deceleration in the economic activity, inverted yield curves (Poland, Czech Republic), elevated inflationary pressures and risk of more currency weakness (which would support inflation expectations).
  • How will the CEE central banks deal with further domestic currency depreciation?
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