During this period all of the CE3 underperformed versus the EUR, but during the previous two periods of EUR weakness the PLN and CZK fared better than the HUF, it added.

Playing EUR weakness for the CE3

"The EUR remains under pressure, struggling with worries over fiscal policy and a sluggish growth outlook. The Eurozone economy is expected to grow 1% this year compared with 3% for the US. EUR/USD started to head south in December 2009, but arguably the period of EUR weakness has been in place for longer," said Stuart Bennet, research analyst at Crédit Agricole CIB in London.

He noted that over the past six months, in carry-adjusted terms, the EUR has posted negative returns against all of the other developed market currencies with the exception of the GBP.

In the very short term Bennett expects EUR/USD to strengthen "as risk appetite should improve and the speculative market, which is very short EUR, should decide to unwind some of this position."

In the medium term, however, from the first half of this year on, "it does appear that the EUR will be on a softening trend against the USD."

Only three clear periods of EUR/USD weakness

The EUR has been in existence only since January 1999 and during this period there have been only three clear periods of EUR/USD weakness, the analyst recalled. These are, broadly, January 1999 to December 2000, January 2005 to December 2005 and July 2008 to March 2009.

"As we enter what appears to be the fourth down-cycle for EUR/USD, what can the previous periods tell us about how the CE3 currencies may behave this time?"

"The CE3 tend to be high-beta currencies. Hence, if EUR/USD declines by 1%, the CE3 will depreciate by as much or more against the USD," Bennett said.

"This relationship can be calculated either by using a log-log regression, whereby the log value of USD/CE3 is regressed against log EUR/USD, or by dividing the covariance of returns between USD/CE3 and EUR/USD. Depending on the period analysed, both measures provide strong support for the view that CE3 will weaken by more than the EUR/USD."

However, the analysis of the three periods of EUR weakness also indicates that "the HUF tends to underperform its regional peers when the single currency is weakening."

During the first two periods of EUR weakness the HUF was a relative underperformer. In the third, corresponding with the credit crisis, all of the CE3 underperformed the EUR.

"Given that we suspect that the next spate of EUR weakness will correspond with a better risk appetite environment it seems likely that - assuming EUR/USD softens into H1 2011 - the impact on the CE3 will prove similar to 1999-00 and 2005. Whilst the trading environment for the HUF is now different - the HUF trading bands were abolished in Feb 2008 and the currency is now freely floating - this past relationship bolstered by Hungary’s economic underperformance still suggests that the HUF will be an underperformer as the EUR dips."

Source: Portfolio Online Financial Journal