The virus situation has improved in a few countries (most notably in Czechia) in the region, while good news regarding vaccine development is also helping global sentiment. Against this backdrop, CEE currencies have gained since the end of October vs. the euro: the CZK rallied by more than 4 percent, the zloty around 3 percent, and the forint by around 1.5 percent.
The debate regarding the EU rule of law regulation, which resulted from Hungary and Poland signalling that they would block the EU budget should the regulation be introduced in its current form, unnerved investors at first.
However, improvement of external sentiment and lower inflationary developments took off some pressure from central banks too. In addition, differing local factors (ie the increase of excess liquidity in Hungary) caused interest rates to diverge, which mirrored FX moves. The 9X12 FRA went up in Czechia by almost 30bp month-to-date, while Polish rates only inched up by around 10bp, and Hungarian rates actually dropped by nearly 30bp. Of course, should the EU budget not be approved in time, risking the region losing billions of euros per annum in inflow as of next year, CEE currencies would feel the pain.
But in this case, the CZK is also likely to be hurt, not just the forint or the zloty. While it is not yet visible what exact solution the EU will come up with to tame Hungary and Poland, markets currently look calm and seem to be pricing in that the rule of law debate will be solved in time.
While the US dollar has better chances of weakening amid the improving global sentiment, given the recent appreciation locally, we think that CEE currencies will correct slightly to the weaker side, in general. We see both the zloty and the koruna softening slightly by year-end, while the EURHUF could trade in a volatile sideways pattern, roughly around its current level.
We do not expect the RON to show excessive volatility by year-end, but the slight depreciating trend could prevail, as this is what the twin-deficit situation would warrant. The HRK and the RSD may remain relatively stable.
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