Crown, zloty seen firming

The Czech crown and the zloty are forecast to strengthen, outperforming their Central European peers in the next 12 months, helped by sound fundamentals and central bank interest rate hike expectations. But a March 29-April 5 Reuters poll of 31 analysts predicted weaker levels for almost all regional units than a month ago as inflation data showed a retreat in annual rates early this year.
That has prompted a shift towards less hawkish central bank comments and monetary policy decision surprises in the region where economies are growing robustly, partly due to surging wages. Serbia's central bank cut its interest rates and Romania kept them on hold despite expectations for increasing them further.
According to the latest poll, the crown will strengthen 2.2 percent against the euro relative to Wednesday's close, to 24.77 over the next year. The zloty is expected firm 0.8 percent to 4.17, and the forint, the leu and the dinar are seen easing 0.5-0.7 percent. All 12-month forecasts, except for the crown, show weaker levels than a month ago.
The Czech central bank (CNB) has the lowest inflation target in the region, and has made it clear it will hike rates further to defend the target if the crown does not strengthen enough. "Given the lower than projected CPI, we expect the CNB to remain dovish in 2018, limiting CZK (crown) strength compared to its own forecast," said Peter Virovacz, senior economist at ING's Budapest unit.
"The lack of CZK strength will enable the CNB to hike interest rates in 2H18," he added. The Polish central bank has lowered its inflation forecasts. Governor Adam Glapinski has said a hike in rates would not be needed before end-2020, and Polish 10-year bond yields have hit 17-month lows.
Remaining expectations for monetary tightening and a decline in Polish debt are still seen strengthening the zloty. The 12-month median forecast for the leu, however, slipped to 4.691 from 4.645, after the Romanian central bank unexpectedly did not increase interest rates again on Wednesday. The projection for the forint eased to 313 from 307.5. "Once the general election (on April 8) is behind us ... we look for a back-loaded HUF strength in 2018 due to the strong fundamentals," Virovacz said. Some analysts said their forint forecasts were based on the assumption the Fidesz party wins a third consecutive term, but some the projections may reflect the risk it loses and policies become unpredictable.