Buying dips in USD/CEEMEAs – Rabobank

Piotr Matys, EM FX Strategist at Rabobank, explains that at this very early stage not much has changed as the CEEMEA currencies are broadly stronger.

Key Quotes

“Driven by robust economic activity and favourable external environment the CEEMEAs produced impressive gains in 2017, excluding the Turkish lira due to unfavourable factors dominated by a diplomatic spat between Turkey and its Western partners. The Czech koruna and the Polish zloty outperformed their peers rallying more than 20% against the US dollar. Both were the only currencies that appreciated versus the euro last year.”

“While market sentiment towards the greenback is far from bullish, the next significant move in the DXY Index in Q1 could be towards the June high at 97.871 based on the Elliott Wave principle. The price action since the middle of November fits into a corrective wave II formed by three moves ABC. Given that wave II tends to retrace substantial part of wave I, the DXY Index could be close to an important bottom followed by wave III higher in the coming weeks.”

“Buying dips in USD/CEEMEAs is our preferable strategy for Q1 to benefit from a potential rebound in the USD. Perhaps a fresh set of US data scheduled this week will prove a bullish catalyst for the US dollar.”

“As the most oversold crosses USD/HUF and USD/PLN are particularly vulnerable to a prospective squeeze higher. In terms of domestic factors, persistently dovish Hungary’s central bank, which heavily relies on unconventional easing tools, is a major factor conspiring against the forint.” 

“Despite growing risk that demand-led inflationary pressure may increase over the mid-term horizon, the National Bank of Poland remains reluctant to even consider a rate hike. Maintaining wait-and-see bias leaves the zloty exposed to external backdrop.” 

“The ongoing dispute between Poland and the EU is another risk factor. After the European Commission took the unprecedented step of triggering Article 7 against Poland over controversial overhaul of judiciary, Poland’s government intends to seek allies across the EU to veto potential sanctions. Prime Minister Morawiecki is scheduled to meet with his Hungarian counterpart Orban on Wednesday. Investors will be looking for Orban to reiterate that Hungary will block any EU moves against Poland. If there is any hint that Orban’s support for Poland may not be as strong as previously assumed, the zloty is set to weaken substantially.”