-- CEE FX extends pre-weekend slide as euro slips against dollar
-- Makes carry trade less appealing to yield-hungry investors
Central and eastern European currencies extended a pre-weekend slide
against the euro Monday, with tensions in the euro zone prompting
investors to unwind bets targeting the neighboring region's higher
yields.
By 1400 GMT, the Hungarian forint was down 1.6% from its July 19 highs
against the euro, while the Polish zloty shed 1.3% of its value, even
as the single currency itself flirted with new multi-year lows against
developed currencies including the dollar, yen, pound, Australian and
Canadian dollars.
Investors have historically assumed that what's bad for the euro area
can be even worse for the bloc's less-developed neighbors because of
the regions' strong trade and financial ties. But after the European
Central Bank slashed its deposit rate to 0% on July 5, it became
fashionable in some market quarters to recommend selling the euro to
fund investments in higher-yielding currencies, including those in
Hungary and Poland where benchmark interest rates are at 7% and 4.75%,
respectively.
The selloff Friday and Monday has undermined that so-called carry
trade and reminded investors that the euro, despite its extremely low
yield, still has a way to go to match more traditional funding
currencies like the dollar and yen.
"Naturally it makes sense to lock in high yields in emerging markets,"
said Peter Kinsella, senior foreign exchange strategist at Commerzbank
AG in London.
"But the euro is at the center of the crisis and hasn't been
performing like a funding currency should," said Mr. Kinsella, citing
the single currency's volatile nature and the fact it does not
depreciate in good times and appreciate in bad times.
For some strategists, investors were simply asking for trouble by
rushing into risky emerging market currencies in the wake of the
euro-zone interest rate cut.
"The CEE rally we had post-ECB rate decision this month was overdone,
and I was surprised by the appetite for these assets considering the
economies have such strong linkages with the euro zone," said Murat
Toprak, senior emerging market strategist at HSBC Holdings in London.
Write to Alexandra Fletcher at alexandra.fletcher@dowjones.com
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(END) Dow Jones Newswires
July 23, 2012 11:16 ET (15:16 GMT)
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