ECB Boost Presents Challenges To Central European Policymakers

The European Central Bank (ECB) delivered on nearly all of the policy options we expected at its June 6 meeting ( see 'Assessing The Aftermath Of ECB Policy Action', June 6) providing emerging market (EM)assets with a boost to risk sentiment. Regional high beta currencies (TRY, RUB) experienced the largest gains, appreciating 1.0% and 0.9% from market close on June 5 to June 9. Turkey and Russia have a much higher tolerance of stronger currencies than other emerging European economies do, having experienced heavy selling pressure and high inflation in recent quarters.

Within Central Europe, the Polish zloty was the biggest gainer (+0.8%), followed by the forint (0.4%). However, stubbornly low inflation means the authorities have a relatively low tolerance of a stronger zloty, and we believe a push past PLN4.00/EUR would prompt serious discussion of monetary easing, capping the potential for a major rally in the currency. The Romanian leu failed to benefit significantly following the ECB's decision, but we expect rising capital flows into RON debt markets to bolster our bullish RON/EUR over the summer. Meanwhile, the Czech Koruna remained unchanged as the Central National Bank (CNB) continues its defence of the ceiling at CZK27.0/EUR. We do not expect the CNB to lift the ceiling until 2015 at the earliest, implying the Czech Koruna will underperform relative to the region in 2014.

Authorities Have Higher Tolerance Of Stronger TRY, RUB
Exchange Rates - Percentage Gain (+)/Loss (-) Against EUR After June 6 ECB Meeting

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