CEE currencies have come under pressure in the last two weeks, while the rouble and the TRY have held up relatively well. The fall in equity prices has always put pressure on CEE currencies.
It was predictable that the US tariff policy would be critical for equity markets. However, the fact that Trump has chosen some absurd approaches and is “taking action” against the rest of the world across the board has also surprised me. I also see the US approach as a major risk to its supremacy, as it does not care about friend or foe and is willing to accept that many countries will increasingly turn to China – if only out of necessity – because the US is unreliable and too forceful.
Equity markets have fallen 20% from their highs in recent days. There is no end in sight to this stampede. Indeed, the sell-off in equity markets is likely to intensify if Europe and China begin to impose counter-tariffs. There is a risk of an escalating spiral that could cause major problems for the global economy.
CEE Currencies Look Bleak for Now
As small economies, the CEE countries are relatively dependent on exports, often directly but mostly indirectly through supplies to German or Austrian exporters.
CEE currencies are also seen as emerging markets and investors hold them alongside the South African rand and other currencies that sell off when equity markets are weak.
The zloty has risen sharply in recent months and now looks set for a setback. The CZK will remain the most stable of the three currencies, while the HUF threatens to weaken significantly.
Tandem Against the Euro: Ruble, Lira and USD
Trump is still very interested in reaching an agreement with Russia – which is interesting because Russia has shown no interest in a ceasefire so far, but is instead trying to increase its military efforts, in part to have more ‘leverage’ in negotiations.
The US tariff policy will be inflationary, at least in the short term. Trump needs much lower energy costs, at least temporarily, to counteract this effect.
The rest of the world will have to increase its budget deficits, which will lead to higher inflation rates in the rest of the world – lower energy costs would also help here.
Bringing Russia back as an energy supplier would benefit everyone except Ukraine, which has nothing to say. States don’t have friends, they have interests. As long as the interests of the US and Russia coincide, both have an interest in pulling together.
Europe should not be too shy about buying more Russian gas again, if only to finance at least part of its rearmament efforts. If the dispute with the US turns ugly, we are now at the mercy of the US when it comes to gas supplies. We are in a real emergency here and have few options, so we will have to buy gas from everyone we don’t like to avoid looking too unilateral. This includes a rapprochement between the EU and Turkey, regardless of domestic or other circumstances there. Turkey is both a large country and a place for EU products, and it is a significant local military power with a well-developed arms industry. In the context of the new (in)security situation, this is also a question of interest for the EU, not one of sympathy.
