* Further FX gains to reduce chances for economic recovery
* Central banks talk down currencies to staunch firming
* Markets may turn more dovish on interest rates
By Marius Zaharia
BUCHAREST, March 10 (Reuters) - The rebound in the EU's
emerging currencies may hurt economic recovery this year and
policymakers look set to fend off investors by keeping interest
rates low and threatening market intervention.
Although the currencies of Poland, the Czech Republic,
Hungary and Romania are still well below pre-crisis highs, weak
demand for the region's exports in the euro zone has officials
worrying that excessive strength could hurt growth.
Drawn by a solid economic outlook, investors propelled the
zloty and the crown to 15-month and four-month peaks this week,
while the forint and leu have been helped by their official
interest rates of 5.75 and 7 percent.
The zloty surge, a 23 percent gain in 13 months, has
prompted two ministers to talk down the currency this month and
central bankers there have cast doubt on the timing of rate
hikes that would raise the zloty's allure. []
Romania's central bank governor also signalled last week he
was concerned the leu could firm too far, spreading fear among
dealers that the bank could intervene between 4 and 4.1 lei per
euro, virtually freezing the currency. []
"We are at a stage where they are afraid that their
currencies are going too strong," said Gyula Toth, EMEA
economist and strategist at UniCredit in Vienna.
"You have a situation when there is a constant inflow of
currency into the country, and from this perspective they will
have to fight quite heavily (against FX firming.)"
UNDESIRED FIRMING
Analysts think Poland and Czech Republic will hike rates
twice in the second half of the year, and markets expect Romania
to cut by one percentage point in 2010 and Hungary by 25-75
basis points, depending on developments after an April election.
But according to a Reuters poll <CEEFXPOLL01>, all of the
currencies are expected to appreciate this year.
Even turmoil tied to debt-stricken Greece is seen helping,
as it has pushed some investors away from troubled euro zone
periphery states into more solid-looking economies further east.
Polish Deputy Prime Minister Waldemar Pawlak said a zloty
level of around 4.0 per euro was desirable, a statement bringing
to mind the government's forays into the foreign exchange market
last year when it tried to keep the zloty from weakening by
converting European Union development funds.
The Czech central bank discussed intervention against crown
firming last year and analysts said they could do so again if
the unit approached 25 per euro. []
"In Romania there was already a hint the central bank might
intervene. In the Czech Republic... we saw verbal interventions
last year and those might come back, and in Hungary it is
already possible to see verbal intervention," said Elisabeth
Gruie, FX strategist at BNP Paribas in London.
She believes markets are pricing in excessively high levels
for rates and sees no hikes in the region this year, a thought
echoed by others.
"Strong currencies in the end will tend to delay rate
hikes," said Timothy Ash, an analyst with RBS in London.
INVESTMENT FLOWS
Raising rates would attract more flows into straight FX
plays. Otherwise, if investors are not going to get more gains
from currencies, they may switch more focus to debt and equities
trades.
BNP Paribas sees more flows into regional debt than FX
instruments in the short term, and Barclays is especially upbeat
on Romanian bonds, as rates have more room to fall there and the
country is pursuing budget cuts backed by the International
Monetary Fund.
Low currency volatility would also redirect flows to other
emerging markets such as Asia or Latin America, which are more
tolerant to FX strength.
If growth does stay strong, governments may also have more
political room to carry out further fiscal reforms, although
elections this year across the region may prove a bigger barrier
to any such tightening of public purse strings.
Locking in a competitive advantage against euro zone
countries and shoring up growth will also benefit incumbent
administrations.
"If you're looking for a soft patch and not a double dip
recession, FX strength already starts to become an issue," said
BNP Paribas's Gruie.
(Editing by Michael Winfrey and Patrick Graham)
