The CEE3 currencies remain vulnerable due to severe geopolitical tensions. All three regional currencies, the koruna, the zloty and the forint significantly depreciated during the summer months. The Polish economy is to the greatest extent negatively influenced by the conflict in Ukraine, what is reflected by diverging business climate indicators. While Hungary’s and Czech’s PMIs point towards improving confidence, Poland’s on the other hand has been gradually declining since February and fell below crucial 50 mark in August. What is more, the correlation between USD/RUB and USD/PLN is much stronger than between regional peers. Consequently, the Polish currency was weaker than the forint, while the koruna, traditionally acting as a local safe haven remains the most stable currency in the CEE3.
However, in our opinion the outlook for the zloty remains constructive. Although confidence is on the decline, the economy still managed to expand at a decent pace (3,3% y/y) in Q2. The deflation caused by statistical effects and globally declining food and energy prices came in as no surprise to both market participants and monetary authorities. This results in Monetary Policy Council’s reluctance to lower interest rates below 2,50%, level which has been maintained for over a year now. As a consequence, the zloty is supported by the highest real interest rates among major EMEA economies. Combined with further monetary stimulus provided by the European Central Bank, it should result in a gradual appreciation against the common currency. As geopolitical tensions abate, the zloty will probably find ground against regional currencies as well.
The haunt for yield spurred by ECB’s action will to a lesser degree support the forint. As the rate cuts cycle is over, we remain neutral towards the Hungarian currency. The low potential growth and high external debt burden exacerbate downside risks to activity posed by the Eurozone’s rebound losing traction. We expect EUR/HUF to hover slightly above 300,00 mark for the reminder of the year.
After several months, EUR/CZK finally drifted away from 27,50. The move towards 28,0 was obviously triggered by geopolitical factors. Nonetheless, since the beginning of the year, Czech Republic’s economic outlook has significantly improved. As a consequence of strong industrial production and upsurge of consumer confidence, The Ministry of Finance was forced to dramatically revise GDP projections upwards (from 1,7 to 2,7% y/y). Consumer spending supports core inflation and therefore consumer prices accelerated to 0,5 y/y in July. The labor market - remains the weak spot unemployment rate stubbornly stays above 7,0%. We expect EUR/CZK to gradually come back to 27,00 on improving growth prospects, emerging price pressures and further ECB stimulus. To sum up, despite being supported by the strongest economic growth and the most hawkish central bank in the region, the zloty turned out to be the weakest currency in the region due to geopolitical risks. We expect the summer depreciation to be retraced and maintain our 4,13 end year target. The koruna should marginally appreciate due to the improving growth outlook. Structural imbalances posing threat to economic recovery make us perceive the forint as the most vulnerable CEE3 currency. We expect EUR/HUF to stay close to recent levels.