When geopolitical risk is decreasing and market optimism is on the rise, this means lower DXY and higher risk appetite, which directly benefit to CEE currencies, for instance. What is perhaps the most striking is that market volatility has significantly dropped in the recent weeks. This may last, especially if the global economy avoids a recession – this is our baseline.
Below is iBanFirst’s forecast on major currencies:
EUR/RON: The RON is one of the most stable CEE currencies. This was the case last year and it is likely to continue this year too. Early this year, a significant increase in ROM government bonds increased market liquidity and thus pushed the RON (YTD performance at +0.42% for the RON). Now, the cross EUR/RON is hovering around the 4.92 level. We don’t think it can sustain a jump above 4.95 in the medium-term. Therefore, it is likely that the cross will remain in a tight range between 4.90 and 4.95 at least until the summer.
EUR/USD: Technical factors, rather than macroeconomics and monetary policy, are the main drivers behind the recent euro weakness. A major consolidation phase for the cross was unavoidable after not having notably consolidated since its launch from the early November lows below 0.9800. We think the 1.05-1.06 era can be an interesting buy signal for the cross with a price target at 1.0950. There is still a long way to go for the currency to move above the 1.10 psychological level. But we are confident the EUR/USD could end the year way above this, perhaps around 1.15.
EUR/GBP: Let’s be honest, we are very surprised by the sterling resilience. The YTD performance of the EUR/GBP is rather negligible (+0.30 %). We are very negative on the UK economy this year. But we acknowledge the currency could be decoupled from the macroeconomic trend. We expect that higher cost of capital will be a major factor of economic weakness. In the United Kingdom, there are around 2 million mortgages to be refinanced in 2023. The locked-in rate was on average about 2.5 % and the new refinancing rate is about 6 %. That’s a lot more disposable income going into mortgage payments if people can afford it. This is one reason why the Bank of England is chickening out. In our view, Quantitative Easing is not going anywhere. Of course, this is a similar story in a lot of places. For instance, in Helsinki (Finland), the average mortgage is about 300 % of net income. With rates rising from below 0 % to 3.5 %+margin, that means over 10 % of the disposable income is removed from the country. This is huge. But in the case of the UK, add the negative structural impact of Brexit too. This means it is likely to get worse. However, that does not necessarily mean the sterling will be in a free fall this year. Our conservative target for EUR/GBP is at 0.90. This is not bad given the economic nightmare the UK is facing.
EUR/CHF: We consider the CHF will outperform this year as the Swiss National Bank (SNB) is more likely to be more hawkish than the European Central Bank (ECB). The ECB will probably pause monetary policy this summer while the SNB will continue hiking longer. Usually, the Swiss franc is mostly evolving depending on risk aversion. This has not been the case lately. Monetary policy is certainly the main driver behind the evolution of the currency. We look for the EUR/CHF to reach the threshold of 0.96 in the medium-term. If political risk increases (tensions are high in Eastern Europe), this could help the CHF, of course. However, our baseline is that political risk will play a marginal role in the FX market this year – meaning that underlying volatility could remain contained.
EUR/CNH: Most Chinese provinces have unveiled a 2023 growth target at 5 % or above. This will be challenging to reach, especially because local governments are still fiscally constrained. A big wave of maturities, property weakness and covid related debts limit their ability to spend. That’s why infrastructure investment is decelerating in 2023. Further fiscal and monetary stimulus is expected. We bet the PBoC will cut interest rates in the second quarter and that the authorities will move forward with their strategy of weak currency. The depreciation of the CNH remains one of the best and more efficient ways to stimulate the economy, notably in a context of sluggish global trade. Therefore, we expect the EUR/CNH will continue to move upward for most of the year.
EUR/HUF: Last week, we saw a wave of selling in the CEE region (EUR/HUF minus 0.02 % on a weekly basis). But the upward trend remains for most of the CEE currencies. This is notably the case for the HUF. We expect the Hungarian currency will outperform this year due to better relations with the European Union, the absence of a severe energy crisis, high base rate in Hungary and improved risk sentiment in global financial markets. Hungary has recently entered into a technical recession (like the Czech Republic). This is not a game-changer, however. Most investors don’t pay attention to this. Weeks after weeks, the HUF is gaining ground against the euro and the dollar. Our EUR/HUF target is now at 360.00 versus a spot rate at 382.00. Some analysts are even more optimistic than us regarding the evolution of the forint (with an EUR/HUF target at 350.00).
EUR/CZK: Core inflation slowed down in the Czech Republic in February (at 12.3 % year-over-year versus prior 13.3 %). This is positive news. The country has entered a technical recession too. But all of this does not really matter for the Czech koruna (CZK). The decline in gas prices and the Czech National Bank (CNB) market interventions are the main drivers of the currency. Monetary policy will likely not be a game-changer in the short- and medium-term as we expect the CNB to keep rates unchanged at 7 % for most of the year. We expect the appreciation of the CZK to continue, but to remain contained. The EUR/CZK is one of the less volatile currencies in the CEE region. This will not change anytime soon.
EUR/PLN: In the short- and medium-term, we believe that the zloty’s underperformance will remain in place (minus 1.23 % YDT against the euro). This is mostly explained by the expected European Court of Justice (CJEU) ruling over Polish borrowers with Swiss franc-denominated mortgages. More than a decade ago, thousands of Polish consumers took out mortgages in Swiss francs to benefit from low interest rates. That was fine until the Swiss National Bank decided to remove the euro peg in 2015. This resulted in a brutal zloty weakening against the Swiss currency. Mortgage-holders were then facing ballooning repayments and took banks to court. Last week, the CJEU’s advocate general issued a very pro-consumers opinion on that matter. This states that Polish banks cannot pursue claims for extra remuneration from thousands of borrowers with mortgage contracts which are deemed invalid because they contained unfair terms. His opinion is not binding. However, the CJEU usually follows it when making a final ruling. This is expected to happen before the summer judicial recess. If the CJEU embraces this approach, this could trigger losses of circa PLN100bn according to the Polish Financial Supervision Authority (this represents about 50 % of the banking sector’s own funds). The cost could even be higher if Polish courts rule in favor of consumers in specific cases. The likelihood of a negative final ruling for the banking sector is no surprise at all. In the last few years, Polish banks have made provisions of PLN30bn. Nonetheless, this is likely insufficient. The Polish banking sector is usually considered as the strongest one in the CEE region. It will eventually overcome this challenge. In the interim, this is a net negative for the zloty. As we are waiting for more news from the CJEU, we forecast the EUR/PLN will likely stabilize around 4.80. If the ruling is negative, the cross could easily jump to the 5.00 threshold.