Take advantage of the moment
-> We recommend opening the bet on strengthening of the Czech currency against the common European currency, taking the advantage of the recent weakening of the currency. This is largely due to past events (downgrade of Greece, surprising cut of Czech National Bank in the second half of December) that should fade out quickly, allowing for the currency to move back to levels better justified by the state of the economy.
-> The horizon is 3 months and the target level is 25.50 which is only a bit weaker than what we think the level referred to in the previous paragraph is. This takes into account the discomfort CNB would in all likelihood feel (and act on) should currency move below this.
-> Fundamentally, too, there is not a reason for not strengthening of the currency in 2010. Real convergence should continue and the average of the currency in 2010 should be around 24.9. Trade balance will (after the record surplus in 2009) still remain positive, although almost 140 bn. surplus from 2009 will not be repeated. Exports will pick up somehow (which will drive imports) but consumer-related and investment-related imports will stay subdued. FDI inflow indeed fell in first 10 months of 2009 (last data available), with inflow into base capital dropping some CZK 27 bn. y/y - this is about the same level we'll see in 2010 (so no y/y change). No matter that, current account next year will be only somewhat larger than this year. 2009 narrowing of the deficit came mainly from lower foreign workers' compensation (direct consequence of the recession), larger surplus of trade balance (somewhat compensated for by lower surplus in balance of services) and lower dividends (another clear sign of recession-stricken economy). Some of the tendencies will continue in 2010: surplus of trade balance, low dividends. By and large, it's hard to see a fundamental reason for sustained weakening of currency.
-> Sentiment also markedly improved since the time (1Q/09) when the region was regularly depicted as a place that inevitably must collapse under the weight of the (perceived) foreign indebtedness. And this improvement should continue, punctuated by short-lived outburst of risk aversion (that should, however, not trigger our 3% stop-loss), associated with regional sell-offs (due mostly to external factors). This will create additional entry points for short EURCZK (levels of 26.40-26.50 are attractive for further entry).
-> EMU economy hit the bottom in 2Q/09, 3Q/09 saw the posting solid q/q growth figures and next quarters should see the growth again - this all brightens the outlook for export-oriented economies (SK,CZ...). 2010 should thus see all CEE economies growing again, this should act as another psychological support for the strengthening. This is borne out in a slew of recent research reports of big institutions. Given the size of these players, this is indeed a fact to note for the (relatively) small currency markets of CEE countries.
Erste Group Research
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