US dollar and EU package helped CEE FX

A sideways movement is more likely in the next months in the USD after the recent, quick weakening, so the support for the CEE currencies from this factor could wane. The economic recovery in Europe looks stronger than expected, however, which is positive to CEE.

Local factors did not matter at all in July

As the summer kicked in, liquidity on CEE FX markets declined. Still, there were developments that affected the region. The general weakening of the USD suggests that the dollar’s demise should be strongly tied to local, US developments, and not a sign of generally improving market confidence. This is reinforced by that the USD appreciated against the CHF too (another safe haven) and not just versus the euro. US developments are hard to predict (fiscal package, virus situation). Thus, volatile sideways movement in the USD during the coming months is more likely than continued weakening. If this is right, then CEE currencies could lose some short-term support.

The other support factor was the agreement around the 750bn EU Recovery Fund and the 2021-27 budgetary framework (MFF). Despite a lower overall MFF, CEE may receive more funds in total compared to the previous, 2014- 2020 programming period, due to the Recovery Fund. The impact of EU fund inflows could be strong until 2023 as a large amount for the 2014-2020 period is still to be paid. While 70% of the Recovery fund also has to be allocated by 2023, it is reasonable to expect that countries will want to spend money as soon as possible (ie. in 2022-2023). This added to the CEE currency rally since mid-July. Additionally, the economic recovery seems to be on track, as evidenced by recent PMI, retail sales and industry readings.

Summing it up, we do not perceive major mispricing on CEE currency markets. The PLN is expected to move with changes in risk appetite, but could remain broadly unchanged. The CZK should slightly appreciate by year-end. The forint appreciated most quarter-to-date. We don’t see much room for further gains, but see risks to our 350 forecast towards the stronger side. The Croatian kuna will likely revert back to the recently established central parity (7.5345) as the tourist season comes to an end in the autumn. The RON could very slightly weaken by year-end, while we have no reasons to think that the RSD will move much in upcoming months.

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