In the first weeks of 2014 most emerging markets experienced significant capital outflows. Most notably, Argentina and Kazakhstan were forced to devaluate the peso and the tenge while Turkish monetary authorities almost doubled interest rates to tame outflows and stabilize the lira. Fears over EM prospects temporarily became the dominant theme driving global markets. Uncertainty surrounding the path of QE tapering once again gave risk seeking investors a push towards emerging markets, but market participants stayed very “picky”. The ruble remained under strong pressure well before geopolitical risks concerning the future of Ukraine arose, while the rand and the lira were weak and fragile due to internal factors and macroeconomic imbalances as well.
At the same time Czech koruna, a regional safe haven, remained fairly stable and the zloty completely retraced depreciation as soon as unfavorable weather conditions raised concern over the US economic growth prospects. In contrast the forint drifted down to levels not seen in two years and faced by far the most severe sell-off in the region.
In our opinion the current form of Fed’s forward guidance will not be sufficient to anchor rates markets when US economy regains momentum lost over the winter. Although another round of emerging markets re-pricing should be expected, it will not influence EM currencies equally.
The forint will find short term support in modest pick-up in economic activity and current account surplus, but we still expect forint to be the most vulnerable among CEE3 currencies. Due to low potential growth, the sustained dovishness of the NBH, political uncertainty and high reliance on external funding, EUR/HUF will remain above 300,00 in 2014.
We believe EUR/CZK will stay close to 27,0. Czech authorities will pursue policy aimed at loosening monetary conditions via weaker exchange rate. Our baseline scenario does not assume lifting EUR/CZK target. However, the CNB may be forced to scale up efforts if growth does not meet central banks optimistic expectations.
As the Polish economy outperforms its peers, local story is most supportive for the zloty. We expect GDP growth to accelerate to over 3 percent in 2014. Inflation well below National Bank of Poland target will lead monetary authorities to remain true to local form of forward guidance and not raise interest rates before the end of Q3. However, tightening cycle may begin before the end of the year. Raising rates from historic lows is justified as GDP growth is sufficient to close the output gap, while gradually improving condition of the labor market will result in demand-side upward pressure on core inflation. We assume that thanks to the relative hawkishness of the NBP, EUR/PLN will gradually fall towards 4,05 in twelve month horizon.
CEE representatives weathered the storm of emerging markets sell-off reasonably well. The koruna was and, unless CNB steps in more aggressively, will remain the most stable currency in the region. Growth prospects and monetary policy perspectives favor the zloty while the forint will once again remain the most vulnerable to re-pricing triggered by the Fed’s tapering.