Central and Eastern European assets were negatively affected by signals from the Federal Reserve last week that the end of its policy of printing money might be near, but foreign exchange analysts at Erste bank argue that floating currencies in the region still have strengthening potential this year.
The "currently overly weak Czech koruna" (CZK) and the Polish zloty (PLN) are the two currencies in the region with the most potential to strengthen, according to a note by the analysts.
For the Czech crown, the current weakness (with the CZK trading above 26 to the euro) is caused by a combination of recent weak data for gross domestic product for the first quarter and the "latently present" threat of the central bank intervening in the foreign exchange market, they said.
The analysts added that, based on fundamentals, the CZK's exchange rate to the euro should be around 24.50, but that "it is hard to imagine the CZK coming back there this year."
But they expect the economy to start growing again this year and therefore the threat of central bank interventions to subside and see the currency appreciating below 25.50 to the euro in the second half of the year and heading towards 25 by the end of the year.
In Poland, they expect the economy to "slowly accelerate" until the end of the year and better data to support the zloty in the longer term.
"Currently, the zloty is weak," the Erste bank analysts wrote, noting that increasing expectations for further rate cuts and worsening global sentiment sent the currency to 4.20.
"Although we do not expect any dynamic growth in Poland this year, slow and steady improvement in the economic situation over the course of the other half of the year will drive the EURPLN toward 4.07 until year-end," they added.
TURKEY STILL ATTRACTIVE
The Hungarian forint (HUF), which strengthened to below 290 versus the euro in the fast half of last week, fell after the Fed indicated the slowdown of quantitative easing.
"The continuation of rate cuts in the coming months can be seen as a done deal," the Erste bank analysts said. They predict that the HUF could be around 295 to the euro at the end of the year.
Their forecast for the Romanian leu (RON) has remained unchanged at 4.4 to the euro. They said that appreciation to below 4.3 would be avoided by the central bank because it needs to stimulate exports, while depreciation to above 4.5 "could be triggered mainly by renewed worries about the eurozone's sustainability."
The RON's exchange rate is likely to see wider fluctuations over the medium and long term, because of an increase in the size and depth of the foreign exchange market, the analysts predicted.
In Turkey, the foreign exchange basket formed of the euro and US dollar depreciated to 2.11 from 2.08 in a week, as investors took profits after a rating upgrade by Moody's to investment grade.
"However, we believe that Turkey will continue to be a favourable destination for portfolio investors and other forms of capital inflows, thanks to its high growth potential, growing international recognition, credibility and improving fundamentals," the Erste bank analysts wrote. They maintained their 2.09 forecast for the foreign exchange basket for the year-end.
The Croatian crown (HRK) is likely to firm modestly in the coming months, due to a seasonal pattern and a one-off effect of a local bond issuance, but towards the end of the year the analysts see the exchange rate at weaker levels, of around 7.60, because of the large trade balance gap and private sector deleveraging.
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