This week has seen various currencies come under assault. In Mexico, the central bank intervened to try and prop up the peso, while elsewhere the so-called CEE3 currencies tumbled as a result of what Commerzbank described as aggressive rate cuts and difficult fiscal situations. As the HUF, PLN and CZK came under pressure, Commerz warned that the currencies could get, “trapped in a devaluation spiral if the local central banks do not react quickly and stop the rate cutting cycles.”
Commerz’s appraisal was damning: “It increasingly looks as if the scenario that we had been warning about for months seems to be unfolding. Without any consideration for the external value of their currencies the central banks cut rates at a perilous rate in an effort to support the local economies. Hungary had to ask the IMF for help in October, but blatantly disregarded its advice to cut rates at a slower pace. Poland on the other hand continues its restrictive fiscal policy in an effort to keep the household deficit within the limits set by Maastricht. By doing so the government risks a further collapse of the economy while the likelihood of the country actually joining the euro in 2011 remains extremely limited.