CEE Currencies Hold Promise
For all the doom and gloom surrounding European markets on the back of the Greek sovereign crisis and concomitant sell-off in euro and sterling, emerging market currencies in the region still look bid. Traditionally, when EUR/US$ has weakened, so too have benchmark central European cross rates such as PLN/EUR and CZK/EUR. However, this correlation has broken down amid concerns over Western European stability and a much healthier recovery outlook for central Europe. (Click on charts to see full image)
Exchange Rate, PLN/EUR
The Czech and Polish economies, with their low levels of leverage, healthy banking sectors and limited external asymmetries are looking much better than their counterparts in the peripheral areas of the eurozone including Portugal, Italy, Ireland, Greece and Spain. Not only has this bolstered foreign investor confidence in the broader Polish and Czech economies, but it has also affected the relative interest rate expectations for the region. While the European Central Bank (ECB) is unlikely to hike rates any time soon, the National Bank of Poland could hike as early as H210. The Czech National Bank too is likely to hike ahead of the ECB. So long as global risk appetite can remain moderate, the combination of intra-EU carry alongside macroeconomic outperformance should keep CE currency crosses on a bullish path.
Exchange Rate, CZK/EUR
Certainly, the technical picture reinforces the fundamental view. PLN/EUR continues to trade within a robust upward trend-channel and having pushed through a psychological resistance level at PLN4.0000/EUR, looks set to appreciate further to PLN3.7000/EUR. The Czech koruna broke through trendline resistance at CZK25.90/EUR on February 17, with a quick run up to CZK25.00/EUR on the cards. Should the unit push through resistance at this point, this would be a bullish signal for appreciation back to CZK23.70/EUR.
Exchange Rate, RUB/basket (basket defined as US$0.55/EUR0.45)
I also view the Russian rouble as looking increasingly attractive, both on a fundamental and technical basis. The push higher in oil back above US$76.00/bbl has seen upside pressures on the rouble build further, prompting the Central Bank of Russia to shift the intervention band above RUB35.00/basket (the basket the rouble is managed against is weighted US$0.55:EUR0.45) for the first time in 13 months. Should oil remain around these levels, the rouble should be able to appreciate back to RUB30.50/basket.