All three major CEE economies have some common characteristics. Growth supported by historically loose monetary policies is clearly picking up in the region. Most recent GDP numbers have surprised to the upside of market expectations in each case. Moreover, Poland, Hungary and Czech Republic share extremely low inflation outlook with the Eurozone. As a consequence, carry opportunities are less attractive in comparison to the other EM currencies.
Nevertheless, local assets in each case will benefit from an unprecedented shift in monetary policy announced in June by the Governing Council of the European Central Bank. Another huge liquidity injection provided in the form of targeted LTRO combined with negative deposit rate will trigger a haunt for yield and once again give investors a push towards emerging markets. It will also support economic recovery in the region through close trade ties with the Eurozone. Peripheral debt and equity markets will continue to outperform fuelling the appetite for riskier assets and currencies. Bearing in mind the positive external environment, local factors justify our mildly bullish view on the zloty, maintain neutral stance towards the koruna and expect the Hungarian forint to drift lower.
The ongoing conflict between Russia and Ukraine harms Polish companies trading with eastern neighbors, but it does not seriously threaten the recovery. Although it has to be noted, that geopolitical tensions are indeed to blame for the divergence in the latest Manufacturing PMI’s readings for CEE3 economies. Nonetheless, Polish economy is expanding at the fastest pace in the region and its potential growth rate is by far the highest. Falling unemployment and high real wages in our opinion guarantee that despite a brief period of deflation which is to be expected in the summer, monetary authorities will refrain from further lowering of benchmark interest rate. Consequently real rates are and will remain positive. National Bank of Poland is the first to raise rates in the region. In our opinion tightening cycle will start in the first quarter of 2015. This backdrop favors the zloty and justifies our end year EUR/PLN target of 4,07.
Our neutral stance towards the koruna results from high credibility of the floor introduced by the central bank back in November 2013. Weaker koruna is to high degree responsible for the bounce in investment and private consumption and therefore the CNB will stick to its policy. As a consequence of extremely low (or even negative) carry the koruna may play the role of regional funding currency. We expect EUR/CZK to hover around 27,00 for the remainder of the year.
In case of the forint, the dovish central bank, which in our opinion is to deliver two or three rate cuts, stands behind our bearishness. Yet our baseline scenario assumes only moderate depreciation pressure. We expect EUR/HUF to gradually rise to 310. Improving growth outlook, reasonable fiscal policy and significant trade balance surplus ensure that external funding needs will be easily met.