The currencies are the Romanian leu, the Czech crown, the Hungarian forint and the Polish zloty, which have all outperformed against a 50 percent – 50 percent euro/dollar basket since the beginning of this month, Benoit Anne, head of Emerging Markets strategy at Societe Generale wrote in a market note on Friday.
Anne noted that the Romanian leu – which depreciated strongly in July because of a political crisis in the country but then strengthened helped by central bank interventions to fend off speculation and earlier this week by a Constitutional Court decision to reinstate the president – has been “the top performer against the basket.”
The other two currencies that have strengthened against the basked this month outside Central Europe are the Brazilian real and the Russian ruble, according to Anne, who argues that the four CEE currencies’ performance cannot be sustained further.
The recent rally was fuelled by increased optimism for a resolution to the eurozone crisis, as remarks by European Central Bank (ECB) President Mario Draghi encouraged investors to believe that the central bank will step up intervention in the markets, he wrote.
“That leaves us with two main scenarios ahead,” Anne explained. “If the ECB does deliver on the policy front, it is quite likely that the risk-on environment will be extended and broadened. But if that is the case, it is likely that the other EM FX high betas will then catch up with their peers.”
‘I WAS WRONG’
In other words, other emerging market currencies will appreciate against the basket in their turn, and the four (shortened to CE4 FX in Anne’s note) will lose their luster.
“An alternative scenario, however, is that the ECB disappoints, which would likely trigger a risk-off correction,” he said. “Under that scenario, CE4 FX would likely appear to be the most vulnerable given its recent strength.”
Societe Generale are short the Hungarian forint against the euro as they believe “it now looks overstretched.” They are also short the forint on a relative value basis against the zloty and the Czech crown.
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“We also believe that CE4 is likely to underperform the dollar-based high-betas in EM FX going forward,” Anne added.
But Nomura emerging markets analyst Peter Attard Montalto called the Polish economy “a Goldilocks economy” and said he was adding to his long zloty against dollar position, saying that “downside risks are certainly present but contained and it is very difficult still to see how they could lead to a recession.”
In another note, called “I was wrong calling for a big August market storm,” Societe Generale's Benoit Anne said: “the major summer storm which I was wary of clearly did not occur.”
But he warned that beyond Central Europe, “the performance of risky assets has been mixed at best.”
The Turkish lira “outperforms the South African rand” on most days but even the Turkish lira was flat against the dollar since the beginning of the month, while “the rand has been left behind in this August risk rally,” Anne wrote.
In Latin America, despite some good data out of the U.S., only the Mexican peso saw “some modest appreciation” but “nothing particularly impressive,” he noted, while “the situation gets even worse in Asia, where the currencies have yet to take off in a meaningful way.”
“The growth picture in the region does not look particularly good, especially after the last China PMI,” he said. “While the panic in the Asian high-beta space is over, there is no strong case for turning bullish on Asia FX as I see it, and on the contrary, my bias would be to be long dollars.”