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In CEE FX space, we are bullish CZK. The exit from the EURCZK floor policy at the 4th May regular meeting is expected, after which we anticipate medium-term koruna appreciation. We continue to believe CZK is fundamentally undervalued (4.5-6.5% based on Q3 2016 numbers) due to twin surpluses and strong productivity growth.
January manufacturing PMIs point to solid growth momentum across the region; we stay UW HUF and PLN, and short EURCZK forwards. Data surprised to the upside in Hungary (59.5 vs. consensus of 56.4) and Czech Republic (57.6 vs. consensus of 56.0); Poland manufacturing PMI disappointed vs. consensus (52.4 vs. 54.8) but is consistent with a decent growth pace.
However, the strength of macro data is likely to have a differentiated impact on CEE currencies. In Hungary, the NBH’s dovish policy stance is at odds with rising inflation and points to risks of rising bond portfolio outflows.
In Czech, the latest manufacturing PMI reinforces our view of strong domestic fundamentals driving CZK appreciation once the floor is removed -we hold short EURCZK forwards.
In Poland, we remain bearish the zloty: 1) it is vulnerable to contagion from political anxiety in Europe, and 2) we think it will struggle to rally from current levels given the extent of recent appreciation against the euro. We entered EURPLN calls last week as an outright expression of our bearish view, given attractive levels of volatility.
In Hungary, we remain modestly bearish the forint, given the central bank’s dovish bias. NBH measures such as capping deposits at the 3m facility, offering liquidity providing FX swaps below market rates and reducing reserve requirements should push rates and FX implied yields lower, putting depreciation pressure on HUF. While Hungary’s current account surplus provides structural support for the currency, we think risk-reward favors a weaker HUF at current levels.
Outright trades:
Long 26-Apr-17 EURPLN call (4.33), spot ref: 4.2966.
Short 27-Nov-17 EURCZK forward.
