Fundamentals that matter

It is a hard time for global markets at this moment. Risk-off sentiment and ongoing nervousness in the global markets have triggered a strong sell-off in risky assets. So while the markets are getting somewhat desperate to see further action from some of the major central banks or perhaps looking for some kind of comforting comments from the central bankers as the fear over the global economy’s heath is building, commodity prices and oil prices tumble. 

Even so, we don’t tend to get carried away by imminent sell-offs and we primarily focus on fundamentals while considering our FX forecast. However, at this point the current collapse in oil prices will have a negative effect on some of the oil exporting countries. This is clearly the case of Russia. Given the current collapse and low oil prices for longer, the Russian economy and Russian rouble will continue to suffer. We have therefore revised our forecast for the Russian rouble in a more negative direction. While Russia will suffer from falling oil prices, other EMEA countries might benefit from that. Consumers in countries such as South Africa and Turkey will clearly welcome falling oil prices. However, that will not be enough to spur weakening domestic demand and the economy in general. Both the South African and Turkish economies are likely to struggle to recover. This is reflected in our FX forecast for both the African rand and the Turkish lira.

With regard to Central and Eastern Europe, we haven’t changed our fundamental view here. We think that the local central banks need to take more action if they should avoid deeper deflationary pressures. This is the case especially for Poland, where our bearish outlook for the Polish zloty is based on the future monetary policy and our expectation of further rate cuts from the Polish central bank. We also remain bearish on the Czech koruna; however, we have now scaled back our expectations of the Czech central bank (CNB) to lift the EUR/CZK floor and in that respect we have revised our EUR/CZK in a more positive direction. That said, compared to market pricing, we still remain negative. The main reason for us to remove expectations of a higher CZK floor is that the central bank has turned more hawkish lately and it also discusses frequently the CZK cap exit and its impact on the CZK. The reason why we maintain our bearish call on the CZK is that we believe that anti-inflationary pressure will intensify again and inflation will not reach the inflation target according to CNB expectations. We therefore expect the CNB to become more dovish going forward. This should push EUR/CZK closer to 28.0 over the coming 3-12 months. Hungary is a somewhat different story as the Hungarian central bank has eased monetary policy quite aggressively already and hence the short-term outlook for the HUF will be mostly driven by general emerging market outlook, while strong Hungary’s external position should be positive for HUF on a 12-month horizon. 

Latvia update: Straujuma set to continue serving as Latvia‘s Prime Minister

Thethree right-of-centre parties that formed the Latvian ruling coalition before the 4 October elections – the Unity party, the National Alliance, and the Union of Greens and Farmers – have this week agreed to form the new government and keep Unity‘s leader Laimdota Straujuma as Prime Minister. The three parties with 61 out of 100 seats in the Saeima, the Latvian parliament, will have a solid majority and keep the pro-Russian Harmony party (the winner of the elections with 24 seats) at bay. The portfolios of the ministers are still to be divided but it is likely that, apart from Straujuma herself, Unity will be in charge of the important finance and foreign affairs ministries. Chair of the Saeima‘s Budget and Finance Committee, Janis Reirs, is mentioned as the likely candidate for the finance minister‘s post. Overall, it is a positive development for Latvia, as the new government under Straujuma‘s leadership is likely to maintain fiscal discipline and a general pro-European course during the upcoming Latvian presidency of the European Union (first half of 2015).