CEE currencies also infected by COVID-19

Clear-cut outcome of US elections could make one of troubling factors for CEE currencies disappear, but virus situation has potential to deteriorate investor sentiment further. Volatility on CEE FX markets could remain high in coming weeks.

Multiple factors keep markets volatile

The economic outlook has become rather uncertain in recent weeks, due to the sharp rise in COVID-19 infections in the region. European infection numbers grew at the same time as well. The low interest rate environment in Europe should support CEE currencies, but home-cooked factors are against near-term appreciation. Due to the worsening economic outlook perceived by market participants, interest rate expectations have fallen in Czechia and Poland by around 5-10bp since early September. In Hungary, rate expectations increased, as the central bank hiked short-term rates to halt a rout in the currency in late-September. Moves in the EURUSD have affected CEE FX markets in the recent past again pretty strongly. The news flow on the US election and possible fiscal stimulus are also having an impact.

If the US election brings a clear-cut outcome, then one uncertainty factor could go away for CEE FX markets. Nonetheless, there is a notable risk that the uncertainty stemming from COVID-19 could actually increase further in the near-term in the region. There is therefore a big chance that market volatility will remain high in CEE in the coming weeks.

While we expect the Czech currency to stay volatile, we still think that the koruna will appreciate later on. Czech central bankers are still the most hawkish ones in the region, and we still see a chance of tightening towards the end of 2021. In Hungary, however, the relatively low September inflation print might allow the central bank to tolerate a weaker HUF. Therefore, we upped our EURHUF forecast to 360 for the year-end. As for the Polish zloty, the currency could remain subject mostly to international factors. As further, notable weakening of the USD is unlikely, we also do not see the PLN appreciating in the near-term. In Romania, the NBR's new tolerance level for the EURRON could be 4.90. Political noise and external factors were negatives recently. The RON may slightly weaken in 2021, due to the twin deficit, but the NBR should be ready to tame excessive moves.

Virus infection numbers rise along with currency weakening

Country overviews

EURHRK – under some depreciation pressures

With the tourism peak behind us, we saw the expected 'normalization' on the FX market and the HRK gradually depreciating above 7.55. We see the ERM II anchor and steady external position supporting the exchange rate close to 7.55 in the coming period. The limited volatility allowed the CNB to remain sidelined for now, though the deviation from the ERM II set parity increases the likelihood of the CNB jumping in eventually. As for euro adoption, the earliest date remains 2023. Following the 2020 slippage, the 2021 fiscal trajectory should be an important shaping factor here.

EURCZK – koruna could still strengthen on the longer run Recently, the koruna has been negatively affected by global sentiment and the worsening of the pandemic in the Czech Republic. Given the current situation, it could stay weaker compared with its development during summer for several weeks or even months. However, we still see room for its appreciation in the medium term, mainly due to the future improvement of market sentiment and development of CNB rates, as we still expect the first hike in 2H21.

EURHUF – forint to remain weak and volatile

The forint was on a roller-coaster ride in recent weeks, despite the central bank hiking the 1-week depo tender rate in September. The pandemic has become a major factor again. The lower than expected inflation in September could have made investors think that MNB will maybe tolerate a weaker currency. Still, the 1-week depo rate could be a tool to tame market pressures, if needed. Volatility can remain high: further upward moves in the EURHUF may not be ruled out, while a sudden hike in the 1-week depo rate looms on the horizon.

EURPLN – zloty should remain under global influence

Zloty has lately been characterized with increased volatility, mirroring the development of US dollar. Recent sharp increase in new COVID-19 cases globally and in Poland is the key risk factor, together with political developments in the US and ongoing Brexit negotiations. We continue to think that the EURPLN will remain subject to global developments. Given the expected sideways movement of the EURUSD, the appreciation potential for the zloty will likely be limited.

EURRON – leu to stay under softening pressure

The EURRON rate was traded slightly above the 4.87 level most of the time in October. Pre-election political noise and legislative initiatives, which could lead to a large increase in rigid public spending, add fuel to the fire, given the general tense global backdrop. We keep our year-end EUR/RON forecast unchanged at 4.90, which could become the new NBR ‘line in the sand' for a while. We see the FX rate remaining under softening pressure over the next three years, due to the relatively high twin deficit levels.

EURRSD – dinar remains stable

NBS's commitment to keep the exchange rate stable around the 117.6 mark now seems like a self-fulfilling prophecy. Investors are discouraged to try to move the market as the NBS has more than enough ammunition to ensure FX stability. The push for dinarization might bring occasional pressures on the RSD as investors' balance their open FX position on the market, but overall we see the EUR/RSD remaining stable throughout the forecasted period.

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