Growth to help CEE currencies shake off impact of dollar rally

BUDAPEST - 7 June 2018: Central Europe’s robust economic growth should help its most liquid currencies firm by 2-3 percent against the euro in the coming year, even though their near-term outlook may remain shaky, a Reuters poll of 36 analysts showed.

A dollar rally and expectations of higher U.S. interest rates, as well as Italy’s political turmoil, knocked the Czech crown, the forint and the zloty to multi-month lows in May before some rebound in the past week.

Most analysts polled in the June 1-6 survey said they did not expect the jitters to have a lasting impact on the currencies of the fast-growing region, which is tightly integrated with the euro zone.

Twelve-month median forecasts for their euro exchange rates changed little relative to a poll conducted a month ago.

The crown is seen gaining 3.2 percent over the next year, relative to Wednesday’s close, to 24.85 against the euro.

Hungary’s forint and the Polish zloty could firm by about two percent, to 312 and 4.2 respectively, recouping almost all the ground they lost this year.

The May sell-off in emerging markets also engulfed the crown, which had been regarded as the region’s safe-haven unit. It is still protected by expectations for a further rise in Czech interest rates, analysts said.

The Czech central bank (CNB) has the lowest inflation target in the region, at 2 percent, and its governor Jiri Rusnok said on Tuesday a surge in wages and crown weakness could prompt the bank to raise rates again sooner than expected.

Marek Drimal, an analyst at Komercni Banka, still expected the CNB to deliver its next hike in November. He said the expectations and solid economic fundamentals could help the crown to strengthen.

STRONG FUNDAMENTALS

Good fundamentals are also seen buoying the forint and the zloty, even though the Hungarian and Polish central banks have pledged to keep interest rates at record lows for years.

According to the poll, the crown and forint could firm slightly in coming weeks, but the zloty - which has been particularly vulnerable, being the most liquid regional unit - could ease to 4.3 versus the euro by the end of June.

The crown belongs to the “safe” camp of emerging market currencies, Citi said in a note, while it recommended selling the zloty and the forint for dollars due to their links with the euro which itself may ease again.

“We think that the Italian crisis is not over yet, as it is not clear to us how the aggressive fiscal plans of the new governing coalition (in Rome) can be accommodated in the European framework,” Citi said.

But if global markets calm down, Hungary’s trade surplus could help the forint and Poland’s solid public finances aid the zloty - and strong economic growth should underpin both. The prospect of no rise in their interest rates is currency-negative, analysts said.

“We do not forecast a deep decline of EURPLN... as the volatility on the markets might lead to more periods of increases like the one lately,” said Dorota Strauch, chief analyst of Raiffeisen in Poland.

Elsewhere, the Romanian leu is expected to weaken by one percent versus the euro over the next year, and Serbia’s dinar could ease 0.4 percent.

Both currencies are more tightly managed by the central banks than their regional peers, which they have outperformed this year.

Romania’s central bank has launched interest rate hikes like the Czechs, but inflation in the country is the highest in the region and “mounting imbalances” in Romania’s budget and external positions could weigh on the leu, said Jakub Kratky, analyst of Generali CEE.

“As the NBR (National Bank of Romania) mentioned that they will allow greater FX flexibility... (this factor), together with strong USD and further policy tightening in the US, will act unfavourably for the leu,” he said.