CEE currencies seen rallying, provided euro crisis eases

Central European currencies are expected to rally in the next 12 months if risk aversion caused by the eurozone debt crisis abates, while Europe's economic slowdown remains a key concern in the region, a Reuters poll of analysts showed. The currencies have fallen 5-15 percent against the euro since the middle of the year, with the decline accelerating in the past two months as the eurozone crisis deepened.
The median forecast in the November 7-9 poll sees Hungary's forint, the biggest recent loser, firming 10.2 percent in the next 12 months from Wednesday close, to 281 - a level weaker than the 275 predicted in a poll taken a month ago. The more a currency lost since June, the more it will recover on the 12-month horizon, according to the forecasts. Poland's zloty is seen firming 7.6 percent to 4.08 against the euro, the Czech crown 5.4 percent to 24.11 and Romania's leu 3.1 percent to 4.23.
These units are the emerging market currencies with the strongest links to the troubled eurozone, Central Europe's main export market and whose banks own most of Central Europe's financial sector. However, the currencies have underperformed forecasts in recent months and their projected recovery hinges on an easing of the eurozone debt crisis which could help the region's high yields benefit from any upturn in risk appetite, analysts said.
"Our forecast is based on the assumption that risk aversion will decline in the course of next year which will bring a recovery of the currencies," said Thu Lan Nguyen, analyst at Commerzbank. The escalation of the euro crisis in the past two months has undermined the crown's earlier status as the region's safe haven unit, though the fall it suffered was still much less then that of the forint, which is seen as the region's most risky.
Despite the European market turmoil, an interest rate cut appeared as an option at the Czech central bank's meeting last week when it slashed its growth forecasts. The crown could firm, lifted by relatively sound fundamentals, if international risk aversion abates. In the poll the crown is expected to firm to 24.95 versus the euro by the end of this month from Wednesday's 25.42 close, to 24.7 in 3 months and to 24.49 in the next six months.
The next months may, however, be shaky for the region and the crown, after a spillover of the euro crisis into Italy. Romania's central bank could even afford to make a surprise rate cut last week to help its economy. The leu has been protected by central bank intervention and an International Monetary Fund (IMF) lifeline.
Poland's central bank which also intervened in the past months to stem falls of the zloty, kept rates on hold on Wednesday and signalled it was unlikely to cut any time soon as a weak zloty could threaten its inflation goal. Hungarian assets have even priced in the possibility of an emergency rate hike partly due to fears that the country's debt may be downgraded to sub-investment grade by rating agencies.
"The HUF is likely to remain the most vulnerable currency in the CEE to further stress in the eurozone financial system owing to Hungary's low growth potential, high FX denominated foreign debt and political risks," Citigroup said. A general recovery of assets in the region could, however, lift the forint. The median projections see it firming to 303 against the euro by the end of November from Wednesday's 309.75 close, to 296 in the next three months and to 290 in six months - levels still much weaker than its 2011 peak around 262.