Little reason to be optimistic

Geopolitical fears have dominated EMEA sentiment nearly all year. However, as geopolitical fears seem to be easing on the back of the – admittedly fragile – ceasefire in eastern Ukraine, other concerns are showing up.

Despite the recovery of the US economy being good news, the fear that the Federal Reserve could initiate monetary tightening earlier than thought is worrying emerging market investors. Hence, while the Fed seems likely to start moving in a more hawkish direction, deflationary fears remain in Europe – not only in the eurozone but also in the Central and Eastern European economies. Consequently, we expect the CEE central banks to move towards monetary easing to curb deflationary pressure. This, combined with more expectations for the Fed, is not exactly good news for the CEE currencies (particularly against the dollar).

In our updated FX forecasts, we remain negative on most of the CEE currencies. This said, this was already reflected in the previous month’s forecasts, so in this respect we have not changed our view on the CEE markets in general. Hence, we stick to our fundamental view that the CEE currencies should remain under pressure, especially on a three- to six-month horizon. Here are our main views.

• EUR/PLN: While there seems to have been some easing of geopolitical risk in relation to the Ukrainian crisis, which should be supportive for the zloty, we believe the outlook for interest rate cuts in coming months is likely to put further weakening pressure on the zloty, particularly on a three- to six-month horizon. We forecast EUR/PLN at 4.30, 4.30 and 4.35 in three, six and 12 months, respectively.

• EUR/HUF: We continue to believe that Hungary’s fairly strong external position is likely to be supportive for the HUF in the medium term, as will the increasingly stronger recovery in growth. Consequently, the HUF could even strengthen moderately against the EUR on a 12-month horizon, while the short-term outlook is likely to be dependent on the general emerging markets outlook as well as developments in the Russian-Ukrainian conflict. The biggest risks to the HUF remain the political uncertainty and the Hungarian government once again taking a ‘misstep’ in economic policy. We forecast EUR/HUF at 320, 320 and 315 at three, six and 12 months, respectively.

• EUR/CZK: Even though the CNB says the weaker koruna cap is not currently justified and stronger deflationary risks would be needed for the CNB to change the EUR/CZK floor, the pressure on the CNB to deliver additional monetary easing remains intact, in our view. Therefore, we keep our bearish forecast for the CZK on all forecast horizons. We maintain our EUR/CZK forecasts at 28.2, 28.5 and 28.5 in three, six and 12 months, respectively.

• EUR/RON: Due to Romania’s improved external imbalances, the RON has become more resilient to external shocks. However, this did not protect the currency completely when the geopolitical risks in Ukraine intensified and all CEE currencies came under immediate pressure. However, with the geopolitical concerns receding recently, the RON has recovered somewhat. We think the RON is almost at its fair value and therefore we do not expect any appreciation pressure. This said, we are perhaps slightly more positive than market pricing. We forecast EUR/RON at 4.45, 4.45 and 4.45 on three-, six- and 12-month horizons.

Three rate decision on the agenda next week but no action expected

We have three rate decisions next week – in Hungary, the Czech Republic and Turkey. We expect all three central banks to stay on hold, which is in line with consensus.

We expect the Czech central bank to keep the key policy rate at the technical zero of 0.05%. We expect the statement to be fairly balanced and neutral. The central bank could note some downside risks to the Czech economy from the Ukraine crisis. In our view, the CNB will still consider the risk to inflation to be on the downside. The market reaction should be very limited, as long as the bank does not turn more dovish, which we do not expect at this time.

We expect the Hungarian central bank (MNB) to stay on hold next week and maintain the key policy rate at 2.10%. Although the risk event on the back of the Ukraine crisis has faded recently and the HUF is currently seeing some relief, we believe the MNB is probably done or very close to the end of the monetary policy easing. The economy is showing clear signs of recovery and seems to be reaching its potential. In this respect, despite headline inflation being extremely low (mainly due to supply-side factors) and swings between no inflation and deflation, core inflation is around 2.5% and therefore fairly close to the inflation target of 3.0%. Therefore, we expect headline inflation to start picking up faster than for instance in Poland and the Czech Republic. The conclusion is that the MNB is done with monetary easing or very close to it.

In our view, the Turkish central bank will remain on hold, keeping the key policy rate at 8.25%. Recently, Turkish inflation has increased further and there is now a clear risk of double-digit inflation in coming months. This said, with growth remaining weak, the underlining inflation pressure is likely to ease off in coming months. Furthermore, we would stress that the recent increase in inflation is driven largely by supply-side factors (primarily food prices), which could be an argument against any monetary tightening. Therefore, we expect the Turkish central bank to stay on hold next week but also for the reminder of the year.