Although the currency war has followed in depth the major players over the last few years, emerging markets are under substantial pressure to perform. Loose monetary policies fed much of the gains witnessed in emerging markets as foreign direct investment dominated the investment scene, chasing after higher yields available in less developed markets. However, now that the Federal Reserve has slowly backed away from further monetary stimulus and moreover is contemplating an interest rate hike, the acceleration in the pace of outflows from emerging markets might spell substantial more downside for emerging market currencies, notably the Czech Koruna.
The Fundamental Picture
The Czech Republic has experienced blockbuster growth over the past few years as an influx of investment chasing after unrivaled GDP expansion sent the economy soaring. After the economy double-dipped into recessionary territory following the bounce in the wake of the financial crisis, the economy has largely turned around since those darker days, staging a rebound since bottoming in 2013. The Czech Republic currently boasts annualized GDP growth of 4.40%, well beyond comparable metrics available from European Union peers. However, despite the optimistic headline numbers, not everyone in the economy has benefited from the rapid rise in fortunes over the past few years.
While economic activity and expansion remain strong, especially considering the extraordinary accommodative measures taken by the Czech National Bank, much has been made of the fact that European Union membership has not caused a substantial uptick in wages and salaries which still trail behind many European peers. With interest rates at 0.05%, matching the European Central Bank, inexpensive wages and prices have enabled the Czech economy to remain competitive in the current export trade paradigm. With policies anticipated to persist, especially with inflationary measures tumbling, “lower for longer” is the clear outlook for policymakers as they struggle to fix imbalances.