Growth to help CEE currencies shake off impact of dollar rally

Central Europe's robust economic growth should help its most liquid currencies firm by 2-3 percent against the euro in the coming year, even though their near-term outlook may remain shaky, a Reuters poll of 36 analysts showed. A dollar rally and expectations of higher US interest rates, as well as Italy's political turmoil, knocked the Czech crown, the forint and the zloty to multi-month lows in May before some rebound in the past week.
Most analysts polled in the June 1-6 survey said they did not expect the jitters to have a lasting impact on the currencies of the fast-growing region, which is tightly integrated with the euro zone. Twelve-month median forecasts for their euro exchange rates changed little relative to a poll conducted a month ago. sThe crown is seen gaining 3.2 percent over the next year, relative to Wednesday's close, to 24.85 against the euro.
Hungary's forint and the Polish zloty could firm by about two percent, to 312 and 4.2 respectively, recouping almost all the ground they lost this year. The May sell-off in emerging markets also engulfed the crown, which had been regarded as the region's safe-haven unit. It is still protected by expectations for a further rise in Czech interest rates, analysts said.
The Czech central bank (CNB) has the lowest inflation target in the region, at 2 percent, and its governor Jiri Rusnok said on Tuesday a surge in wages and crown weakness could prompt the bank to raise rates again sooner than expected. Marek Drimal, an analyst at Komercni Banka, still expected the CNB to deliver its next hike in November. He said the expectations and solid economic fundamentals could help the crown to strengthen.
Good fundamentals are also seen buoying the forint and the zloty, even though the Hungarian and Polish central banks have pledged to keep interest rates at record lows for years. According to the poll, the crown and forint could firm slightly in coming weeks, but the zloty - which has been paricularly vulnerable, being the most liquid regional unit - could ease to 4.3 versus the euro by the end of June.
Elsewhere, the Romanian leu is expected to weaken by one percent versus the euro over the next year, and Serbia's dinar could ease 0.4 percent. Both currencies are more tightly managed by the central banks than their regional peers, which they have outperformed this year.