CEE FX to resist second wave fears, focus on economic recovery: Reuters poll

By Alan Charlish and Miroslava Krufova

WARSAW/PRAGUE (Reuters) – Most central European currencies will firm over the next 12 months, a Reuters poll showed, buoyed by improved risk sentiment as investors shrug off worries about a rise in coronavirus cases and focus on hopes of economic recovery.

The reopening of economies has helped central European currencies recover ground after they took a hammering in the early stages of the pandemic and a recent spike in infections has not significantly dampened investors’ optimism.

“The baseline scenario for the global economy, which expects recovery of global economic activity … will be positive to risk sentiment in financial markets, which should be supportive also for CEE currencies,” said Radomir Jac, chief economist at Generali Investments CEE in Prague.

Expected to be the region’s best performing currency, the Czech crown is seen firming 1.7% to 25.725 against the euro from Tuesday’s European close.

“The Czech currency is supported by the relatively still very solid fundamentals of the Czech economy … the interest rate differential also remains favourable and the Czech central bank does not seem to plan further easing of monetary conditions,” Jac said.

Since March, the Czech central bank has slashed its main interest rate three times, by a total of 200 basis points, to 0.25%, but governor Jiri Rusnok has said a further cut could threaten financial stability while other rate setters have also pointed to stable rates ahead.

The Polish zloty is seen strengthening 1.1% to 4.35 over the next 12 months, while the Hungarian forint is expected to firm 0.9% to 343.

Marcin Sulewski, an economist at Santander Bank Polska, said he did not expect rising coronavirus cases to spook the market, despite daily infection rates in Poland hitting record highs over the past week.

“The key assumption here is that nobody, or very few people, expect that such strict laws like during the first wave could be reintroduced now,” he said.

Some market participants had speculated the Polish central bank could intervene to weaken the zloty after it said in June the economic recovery could be “mitigated by the lack of visible zloty exchange rate adjustment to the global pandemic shock”.

“The risk of FX intervention has declined in our view in recent weeks,” said Sulewski, pointing to an interview with news agency PAP by rate-setter Jerzy Zyzynski, who said the comments were only informative and not intended as a form of intervention.

Romania’s turbulent political scene and twin budget and current account deficits will weigh on the leu over the coming year, the poll showed. It is expected to fall almost 1.0% against the euro to 4.88.

“A series of elections scheduled later this year and the subsequent fiscal outlook imply risks for the leu and for the sovereign rating,” said Jakub Kratky a financial analyst at Generali Investments CEE.

(Reporting by Alan Charlish in Warsaw and Miroslava Krufova in Prague; Editing by Alison Williams)