Most CEE currencies should not appreciate further after recent rally

Positive international sentiment and the reversal of the reflation trade boosted CEE currencies in recent weeks and months, but this could be overdone, as the Fed goes ahead with tightening

‘Can you imagine further appreciation of your currencies against the euro in the coming months?'

Croatia: Taking into account seasonality in the exchange rate pattern, we expect to see further appreciation pressure as tourism season hits full swing, among other supportive drivers. However, as indicated by the recent CNB reaction in terms of two FX interventions, we see the central bank standing ready to tone down any sharp currency volatility. Bottom line, we see an improving fundamental picture (steady external position, improved fiscal developments and EDP exit), coupled with the seasonal effect, driving the exchange rate footprint towards the lower part of the 7.35-7.55 band in the coming months.

Czech Republic: The EURCZK has appreciated recently, due to favorable economic data (mainly GDP and wage growth) and hawkish communication from the CNB. In our view, the CNB will increase interest rates in November, as the pro-inflationary impact of accelerating wage growth together with a significant increase in housing prices should be more important for several bank board members than the loose monetary policy in the Eurozone. We expect that the higher possibility of a hike in 2H17 is now priced in to the EURCZK, and thus there should not be any significant change in the coming months. We expect the EURCZK to stay approx. within the 26.0-26.3 range.

Hungary: The Hungarian forint appreciated until the middle of last week, when the EURHUF cross bottomed out. Since then, there was a correction in the exchange rate, and as a result, the pair edged above 308, which has proven to be a strong support level thus far. We continue to foresee the EURHUF above the 310 threshold in 2H18, as domestic interest rates will stay put at the current depressed levels until end-2018. In addition, the Fed's plans for a balance sheet reduction may roil financial markets and turn international market sentiment to the worse, which could put additional pressure on the forint, causing depreciation against major currencies. The volatility of the Hungarian currency may become elevated as well.

Poland: The zloty has been outperforming other currencies in the region for a while, gaining almost 5% YTD and hitting a 2Y low of 4.17 in mid-May. We expect stabilization of growth potential in the coming months, as domestic factors are unlikely to trigger further strengthening. Moreover, expectations of further rate hikes in the US should limit the potential of the zloty (which depreciated vs. the EUR from around 4.18 to around 4.23 after the FED announcement on Wednesday). We expect the PLN to remain strong throughout the year, with a year-end forecast of 4.21 vs. the EUR. Strong growth in 1Q17 and a good economic outlook are positives. Among possible risks, the biggest one is politics, which could cause risk aversion and a withdrawal of investors.

Romania: Our baseline scenario is consistent with a weakening of the leu against the euro towards 4.62 in December 2017. The RON has been the only currency in CEE not under appreciation pressure recently. A number of factors may have contributed to this: (1) lower portfolio inflows, potentially due to mounting fiscal risks; (2) the current account deficit is gradually moving up, while EU funds inflows have been underperforming; (3) central bank rhetoric, which is unsupportive of RON appreciation, out of fear of further fuelling the widening of the external imbalance. Concretely, the NBR stance is not reflected in hard cash interventions yet, but it lends further reasoning to the central bank's loose (officially dubbed 'adequate') liquidity management, thus supporting the delay of any monetary tightening measures, despite the widening output gap. Looking ahead, we see the aforementioned factors continuing to be relevant and acting in the direction of underperformance of the RON when compared to regional peers. The central bank could hike the depo facility rate or intervene directly in the FX market only in the case of sudden jumps in the EURRON.

Serbia: Stronger appreciation pressures on the Serbian dinar from late April brought the EUR/RSD down from near the 124 mark to near 122, the strongest level since 2015. These pressures are mostly a result of increased LCY lending, better internal and external stability indicators, somewhat stronger capital inflows and the clearer political situation. However, although we expect the dinar to remain under such pressure in the short term, with some seasonal strengthening during summer, until the year-end we expect gradual easing of such pressures, mostly due to the expected stronger imports and limited capital outflows after the expected third FED hike and repositioning before ECB decisions in early 2018. Bottom line, we see the dinar moving towards the 123.5 mark at the end of 2017.

Download The Full CEE Macroeconomic and Fixed Income Research