Speculation concerning the timing and pace of the tapering of Federal Reserve’s asset purchases programme remains the main theme in global emerging markets. We believe that the end of quantative easing era is closer than the market assumes. Therefore we maintain our bullish call on the dollar. Bearing in mind how severe were the outflows of capital from regional bond markets when Ben Bernanke introduced the word “tapering” to investors’ vocabulary, one may expect the outlook for CEE3 currencies to remain extremely bleak.
With another round of uncertainty over the US budget around the corner, the beginning of 2014 might be gloomy for the zloty and other regional currencies. Obviously the risks are skewed to the downside, yet we represent the view that any major selling pressure will be short lived. First of all, our EMEA risk appetite indicator has recently moved back to neutral levels. Secondly, current levels of EUR/PLN are in accordance with our short term equilibrium models. What is more, the deviation of real effective exchange rate from its’ long term mean hints that none of the CEE3 currencies is prone to severe sell-off due to overvaluation.
In other words, positioning and valuation suggest that regional currencies are less vulnerable than half a year ago. Finally, the macro backdrop became much more favorable and we assume it will spur capital inflows to the EM equity markets. As the global economy recovers, the growth outlook has been improving in CEE3 economies as well. While we see tentative signs of stabilization in Czech Republic and Hungary, we expect the Polish economy to continue to outperform its peers. Growth bottomed out in the second quarter and we believe the economy will expand by 2,7 percent year on year in 2014. Consumption driven recovery will gradually close the output gap and finally put upward pressure on prices. The local form of forward guidance caps rates markets for now, but the recovery will finally support the zloty.
We expect the National Bank of Poland to (twice) raise rates in the fourth quarter of the next year. At the same time The Hungarian Central Bank (MNB) will pursue its policy of gradual easing. It is not clear easing bias that threatens the forint the most, but political issues. They remain the main threat for Hungarian currency making it more volatile and vulnerable than the zloty and krona, renowned as the regional safe haven. The latter’s upside potential is obviously limited by the CNB, which started intervening in the FX market and set 27,0 as EUR/CZK target.
To sum up, Hungarian forint is supported by the weakest fundamentals and should be perceived as one of the most vulnerable currencies in the emerging markets world amongst TRY or ZAR. Having the growth and monetary policy outlook in mind, the sell off of the zloty in the first months of 2014 will be completely retraced in the remainder of the year (our 12M target for EUR/PLN is 4,12). The krona will be the most stable, but with persistent threat of deflation creating risk, the CNB may raise its target.