RZB: short outlook for CEE currencies

CEE currencies correct amidst broader sell-off, fundamentals remain solid

Over the last days the CEE currencies experienced a stronger depreciation in the wake of a sell-off of other higher yielding currencies like the South African rand and the Turkish lira. The correction, which actually started at the beginning of 2007 albeit at a slower pace, follows a particularly strong development of the CEE currencies in the fourth quarter 2006. The Czech and the Slovak crown as well as the Romanian leu ended the year 2006 near all-time strong levels. The Polish zloty appreciated by around 4% in the fourth quarter 2006, the Hungarian forint even by almost 7%. Clearly this created some room for a temporary correction even though the economic fundamental remain solid for the most part and it is why we have foreseen a temporary correction for the first quarter 2006 in our quarterly forecast scenario.

RZB\'s analysts still believe that in a longer term perspective (i.e. viewing end 2007 and beyond) the domestic economic fundamentals should remain supportive for a continuation of the long-term real and in part nominal appreciation of the CEE currencies. Another aspect supporting this view is that yield spreads of local currency bonds vs. its Eurozone peers have hardly widened. Still, the current situation could linger on for some time if the external factors (i.e. rising international bond yields and a strengthening dollar on the back of a surprisingly resilent US economy) which have triggered the latest wave of correction were to persist. However, this is in sharp contrast to what RZB\'s baseline forecast scenario predicts. Hence, our analysts believe that the current correction will indeed be temporary and should offer investors good opportunities to buy into the market at more attractive levels.