Many will have breathed a sigh of relief when, after six months of haggling, Angela Merkel and her Christian Democratic Union (CDU) party managed to cobble together a ‘grand coalition’ with the discredited and seriously enfeebled Social Democratic Party (SDP). Support for both these centrist parties is at its lowest ever, and the far-right Alternative für Deutschland (AfD) is the de facto opposition. The new government’s interior minister, Horst Seehofer (of Bavaria’s Christian Social Union), last Friday said: “Islam does not belong in Germany”, echoing AfD’s anti-immigrant stance. He followed this up on Sunday by criticising the EU for failing to protect its borders and taking a ‘moralising’ tone towards Eastern Europe and the distribution of migrants.
As in so many parts of the world, Eastern Europe has issues of its own, of which an increasingly Eurosceptic stance is one of many; whether this is a ‘problem’ depends on one’s point of view. The European Council, now headed up by Poland’s ex-Prime Minister Donald Tusk, and the President of the European Commission, Jean-Paul Junker, have clear and negative views on these political trends.
As a trader, I feel that most of the time politics is irrelevant to market moves; and as a writer I don’t think readers will be interested in my views. Only if something very big, pressing, or ugly is likely will I adapt my strategies. I monitor undercurrents, shifts in trends and spending patterns, where price action often gives early hints as to how these are evolving.
So today I’m looking at the currencies of the Czech Republic, Hungary, Poland and Slovakia, sometimes called the Visegrad group, to see if politics is affecting them. The Czech National Bank’s in the lead, raising interest rates in August – the first EU nation to do so – to maintain price stability. Inflation peaked in October 2017 at 2.9 per cent and is now 1.8 per cent; the key repo rate up to 75 basis points from just 5 since 2012. The koruna, which has strengthened from 38 to the euro at the start of this millennium, peaked at 28 in 2015 and has strengthened to 25 over the past four quarters. This steady and controlled move is a credit to those making and explaining monetary policy; we expect it to continue to 23 korunas.
The Hungarian forint since 2008 is ‘freely floating’, interest rates and exchange rates kept as stable as possible so as to maybe join the euro. Again, credit where credit’s due, the Magyar Nemzeti Bank has maintained a tight range around the central 312 forints per euro. To do so it has trimmed its key interest rate from a peak at 11.5 per cent in 2008 to 0.90 per cent today. There is still room for manoeuvre as the European Central Bank's target rate is currently minus 0.40 per cent.
For the Polish zloty we have more data and, while the fluctuations have been wider, a central rate of 4.25 per euro has been maintained for 20 years. Nearly all this time, excepting the sudden big swings in 2008 and 2009, all trends have kept within two standard deviations of the mean regression. No mean feat! Inflation is now running at 1.4 per cent from over 4 per cent in 2008 to 2012, reflected in the key interest rate being 1.5 per cent from 6 per cent in 2008.
Slovakia currently is not really on international investors’ radars.
