Hungarian 5,000 forint notes. The forint, the Polish zloty and the Czech koruna have all been battered against the euro as the sovereign debt crisis deepens.Laszlo Balogh/Reuters
Far from benefiting from being outside the euro zone, eastern European countries are feeling the strain of exclusion from the club. Fears over the effects of euro zone turmoil in the Czech Republic, Hungary and Poland have sent the value of their currencies plummeting.
Since last Wednesday, when the euro began to feel the strain of escalating borrowing costs in Italy, the Hungarian forint has fallen more than 3 per cent against the single currency and the Polish zloty has weakened 1.5 per cent.
Even the Czech koruna, until as recently as last month the relative haven of the region, has lost its crown. After holding up well all year against the euro, the koruna has suffered a fall of 2.5 per cent in the past five days.
Foreign currency analysts have turned against the region in force. Economic analysis notes floating around in September argued confidently that the koruna had haven status among emerging market currencies. Now, many have performed a volte face on the Czech unit and recommend selling it against the euro.
Many analysts are surprised it has taken the foreign currency market so long to work out that the impact of the euro zone crisis on the region's close trading partners in eastern Europe was likely to be severe.
The Czech Republic is the most exposed emerging market to the euro zone. In the past 12 months, its exports to the region as a share of gross domestic product were 49 per cent, according to data from Haver Analytics compiled by UBS.
Hungary's exports to the euro zone made up 44 per cent of its GDP, while Bulgaria and Poland both export 20 per cent of their GDP to the region.
By contrast, Russia's exports to the euro zone are less than 10 per cent of GDP, while Turkey's are just over 5 per cent.
Consequently the fact that the koruna fell from grace only last week was seen as a rather belated reaction. "I'm surprised it has taken this long," says Bhanu Baweja at UBS.
The Czech currency has suffered a drastic change to its profile in recent weeks thanks to the actions of neighbouring central banks. For most of the year, the koruna has been used as a "carry" currency for the region – with investors borrowing in the relatively low-yielding koruna to invest in other currencies with higher yields, such as the forint. When risk aversion rose, traders closed the position, causing the koruna to strengthen.
But the actions of Poland's central bank – it stepped in to defend its currency last month – have made the carry trade far less attractive.
On Tuesday, the Hungarian central bank also indicated that it was not happy with how weak the forint had become. Many analysts are expecting a sizable interest rate rise in the near future. Benoît Anne at Société Générale predicts the Hungarian central bank will need to raise rates by 2 to 3 per cent if it is to have any effect in stemming the tide of money leaving the country.
The Czech Republic, by contrast, is expected to keep its currency weak, in part because of the importance of exports to the country. As a result, the koruna is no longer seen as defensive.
"It was the yen of emerging markets, but the trading characteristics of the koruna have been seriously altered," says Mr. Anne.
In fact, shorting the eastern European currencies against the euro is becoming the new hot trade – which is lending support to the euro itself.
"You're starting to see traders talk about this as being the next game, which is more of a European economic slowdown story," says Geoffrey Kendrick at Nomura.
The prospects for the forint and the zloty are not much better. Hungary's outlook was downgraded by Fitch last week to negative. The country's banks in particular are suffering, as a result of the introduction of a law that forces them to allow homeowners to pay back at below-market rates mortgages that were taken out in foreign currencies such as the Swiss franc, which has since soared. The move is expected to harm bank profits.
And on Tuesday, Moody's, the credit rating agency, revised its outlook for Poland's banks to negative.
Yet analysts at UBS think shorting the koruna against the U.S. dollar is one of the best ways of expressing a negative view on Europe over the next year, in part because the other eastern European currencies have fallen so much.
A difficult year lies ahead for these currencies. "I think they will continue to underperform," Mr. Baweja said. "There is no real reason for them to outperform."
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