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Central Europe's economic recovery should strengthen the region's main currencies by about 2 percent against the euro in the next 12 months, a monthly Reuters poll of analysts showed on Wednesday. Contagion from Ukraine's turmoil remains a risk, but fairly sound economic indicators offer some protection. The region's assets have rebounded over the past 2 1/2 weeks from an earlier decline, in a rally fuelled by relief that Russia's annexation of Ukraine's Crimea did not lead to full-fledged combat.
The conflict, however, is still simmering. A big drop in Ukrainian or Russian economic output could hinder Central Europe's recovery and keep its markets volatile. And some analysts say the recovery of some of the region's currencies against the euro has been overdone.
According to the March 1-April 2 poll of 31 analysts, the forint may weaken half a percent against the euro by the end of this month from Tuesday's close at 307. The leu may also give up some ground.
Analysts say the central banks of "junk"-rated Hungary and Romania may have cut their rates too low, and their currencies could plunge if the upheaval seen in other emerging markets over the past few months returns.
Hungary's centre-right Fidesz party is well-placed to win elections on Sunday and form a strong government again. Their is some risk the far-right Jobbik party will strengthen and put pressure on economic policies in the coming years.
"The monetary policy risk is still much, much bigger than what I can imagine as risk from the elections," said Janos Samu, analyst of Concorde. A Fidesz plan to aid foreign currency borrowers also posed significant risks for the forint, he said.
The region's fiscal and financial accounts are much better than the indicators of emerging economies like Turkey and South Africa. Both suffered past months from current account problems and political turmoil. Even Hungary, which has the region's highest debt at about 80 percent of output, has a big current account surplus and stable state finances.
Ukraine's crisis or a sharp slowdown in China could hinder the European Union's economic recovery generally. But investors have been picking assets in the euro zone peripheries and in Central Europe in past weeks as global risk appetite rose.
Hungary's 10-year bonds, yielding about 5.6 percent, offer a 4 percentage-point premium over corresponding Bunds. The central banks of Hungary and Poland are expected to start to reverse their rate cuts around the end of this year, when yields in developed markets are also expected to rise.
The poll consensus foresaw a 2.3 percent gain for the forint in the next 12 months, to 300 to the euro. The zloty could firm 1.9 percent to 4.1, the Czech crown 1.7 percent to 27, and the leu 0.7 percent to 4.434.
The predicted zloty level is weaker than a 4.05 consensus forecast in a poll conducted a month ago, before the Ukraine crisis caused a slide of the region's most liquid currency.
"While the economic situation in Poland remains PLN- supportive, the recent more-dovish stance of the MPC (central bank) and possible delay of the first (rate) hike into 2015 may also mean that more substantial PLN appreciation will occur later than we expected," said Raiffeisen's Dorota Strauch.
"As a result we now expect the EUR/PLN to consolidate around 4.15 in the coming months," she added.

Copyright Reuters, 2014

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