Looking for some direction

Next year is drawing closer and people are starting to wonder how it will look. We believe that the emerging markets in general will experience another bumpy year with difficulties. There is a feeling of a lack of direction in global emerging markets. On the positive side, the US recovery should continue going into next year but the headwinds for emerging markets, such as the uncertain outlook for Chinese economy and commodity prices, will continue to be one of the main drivers for them next year. Furthermore, the crisis in Ukraine remains unresolved and tensions and fighting have recently re-escalated in Eastern Ukraine. The relationship between Russia and the west has also cooled further. Indeed, the feeling of the world entering a new cold war scenario is becoming clearer to investors around the world. The escalating crisis – combined with sharply lower oil prices – has hit the Russian markets and the Russian economy seems poised to fall even deeper into recession in coming months. Finally, deflation is becoming more visible in Europe and Eastern European countries are being hit by outright deflation. All these factors are reflected in our updated FX forecast for these currencies.

EUR/PLN: while the deflationary situation in Poland warrants significant monetary easing, the NBP is not likely to act in the near term, in our view. This effectively means the NBP is keeping monetary policy too tight, which is giving some support to the zloty. With EUR/PLN close to ‘fair value’, we do not expect any major movement in the zloty in the next 12 months. We forecast EUR/PLN 4.25, 4.26, 4.28 in three, six and 12 months.

EUR/CZK: the Czech central bank (CNB) acknowledges that a weaker CZK than the cap (27/EUR) is helping to bring inflation to target more quickly and to fuel economic growth. The CNB is giving a clear signal that it prefers the EUR/CZK closer to 28. Hence, while we do not expect the CNB to raise the EUR/CZK floor, we expect it to ‘talk’ the CZK weaker. We maintain our negative forecast on all forecast horizons versus the spot and market pricing. We forecast EUR/CZK 28.0, 28.0 and 28.0 in three, six and 12 months.

EUR/HUF: we continue to believe that Hungary’s fairly strong external position is likely to be supportive for the HUF in the medium term, as will the increasingly stronger recovery in growth. Therefore, we believe we could see the forint continuing to strengthen (moderately) on a three- to six-month horizon. We forecast 300, 300 and 305 in three, six and 12 months.

USD/RUB: we have changed our forecast for the Russian rouble following the central bank’s decision to let the rouble float freely. Fundamental factors are likely to weigh on the rouble in the coming year – no matter what happens geopolitically. We expect these factors to be particularly negative on a three- to six-month horizon rather than on a 12- month horizon. Our new USD/RUB forecast is therefore 49, 51 and 51 in three, six and 12 months.

USD/TRY: continued fairly high inflation and a large current account deficit are likely to continue to weigh on the lira over the longer term. However, the recent sharp fall in oil prices means we are likely to see a significant improvement in the current account situation in coming quarters. This should lend some support to the lira and will limit the risk of a major sell-off in the currency. Overall, we think the lira could perform better than implied by futures. Our USD/TRY forecast is 2.23, 2.26 and 2.35 in three, six and 12 months.

USD/ZAR: given South Africa’s external imbalances, the rand remains highly exposed to swings in risk sentiment. With ongoing woes over global growth and falling commodity prices, risk aversion remains high and the rand is under pressure. Given the weak economy, downward pressure from commodity prices and South Africa’s large current account deficit, we are negative on the rand on all forecast horizons. However, we are somewhat less negative on a short- to medium-term horizon than market pricing. We forecast 11.25, 11.45 and 11.90 in three, six and 12 months.