* QE2 having little effect on CEE currencies
* Strategists say too many global uncertainties for gains
* Eyes on U.S. recovery, dollar level, euro zone periphery
By Michael Winfrey
PRAGUE, Nov 11 (Reuters) - The wall of money expected to
follow the Fed's second round of quantitative easing has skipped
over emerging Europe, but economies with strong growth and
fiscal positions will eventually benefit.
Despite expectations that a move by the U.S. Fed to buy $600
billion in government bonds for six months would extend a
liquidity-fuelled rally in the European Union's emerging east,
the Czech, Polish, and Hungarian currencies have barely budged.
Part of that is due to much weaker growth prospects than
countries competing for the same flows across the world in
Latin America and Asia, where investors see currencies jumping
by 5 percent or more against the dollar this year.
Another reason is low interest rates. Poland's 3.5 percent
and the Czech Republic's 0.75 percent are far below Brazil's
10.75 percent, and the cost of borrowing in India, Turkey and
South Africa is at 6 percent or more.
Strategists said renewed worries of a euro zone debt crisis,
and positive U.S. jobs data that has pushed the dollar higher,
has also braked a months-long portfolio-fuelled rally that
helped push the forint and zloty 2 percent higher since August.
"QE2 was going to be a wall of money, a one way trade. But
now we've got QE2, there's a few more things out there where
people don't know which way they are going to turn, so people
are just holding back a bit," said RBS strategist Tim Ash.
One advantage -- that the EU's emerging members foreswore
capital controls to enter the bloc -- sets them apart from their
emerging Asian and Latin American counterparts who are now
trying to staunch an inflow of QE-fuelled funds which has pushed
up their countries and damage their terms of trade.
But that advantage has done little to lure the latest wave
of money. Since the Fed's Nov. 3 decision, the crown has eased
0.66 percent and the Hungarian forint 1.07 percent. The Polish
zloty is up 0.53 percent and the Romanian leu 0.4 percent.
TOP PICK: POLAND
Country specifics are also in play, so even though the
region is lagging other emerging markets, countries with lower
debt levels and solid growth outlooks will outperform others.
In Poland, expected to grow 3.5 percent or more this year,
policymakers are expected to hike rates from their all time low
of 3.5 percent over concerns of rising inflation pressure.
That will certainly attract new funds from investors seeking
yield in countries with solid economic and fiscal fundamentals,
building on liquidity-fuelled momentum that has largely favoured
it and Turkey by drawing funds fuelled by cheap western money.
The Czechs, which many analysts now call a "little Germany",
are seen an even safer bet, but with official rates at 0.75
percent, the crown carries only the promise of gradual
appreciation based on economic fundamentals.
One of the most difficult puzzles is Hungary, whose new
government has shocked markets with crisis taxes on mainly
foreign companies and a plan to raid citizens' contributions to
private pension accounts that analysts say will stifle growth
and hurt Hungary's democratic and business climate credibility.
But the measures will allow Budapest to cut its 2011 budget
deficit to below the EU-prescribed level of 3 percent of annual
output. With a debt load just above the EU average, a primary
budget surplus of more than 1 percent and interest rates of 5.25
percent, many investors are willing to take a short-term risk.
"You've got to be schizophrenic about Hungary," said
Barclay's Capital strategist Koon Chow. "The very short term
attitude is, it is underowned, underpositioned, and by raiding
the pension funds and hitting corporates with new taxes, they
have the power to amass significant liquidity reserves."
Investors are keeping a close eye on ratings agency Moody's,
which is expected to finish a review of its outlook on Hungary
this month and has threatened to downgrade it if the government
does not produce a credible fiscal policy.
LEVELS APPROACHING
The crown has outperformed its peers in 2010. It is up 6.9
percent on the year. The zloty is close behind at 5.7 percent.
The forint and Romania's leu have fallen about 2.25 percent and
1 percent, giving at least the former room for upside.
The Polish zloty and Czech crown are expected to firm 2 to 4
percent to the euro in 12 months, according to a Reuters poll.
Hungary's forint is seen flat. []
"Poland is still our top pick, but we think the forint is a
close second. The Czechs, because of low interest rates, would
be in a third position," said RBC strategist Nigel Rendell.
The zloty has traded near a six-month high this week, twice
breaking through the 3.890 resistance level that formed a
double-bottom hit over the past month.
The forint looks set to weaken in the near term and test 278
per euro, a strong support that held as resistance for most of
the summer until the forint broke through in mid-September.
But without clarity on the global issues -- such as the euro
zone debt troubles and the state of U.S. recovery -- QE2 will
not trigger a new flood of funds into a region with lower growth
prospects and policy rates than in Asia and Latin America.
"Everyone had this great hope that QE would solve all these
problems," Rendell said. "But now it's come and everyone is a
bit nonplussed ... On the other hand, if the Fed hadn't done QE,
then we'd all be in some kind of depressed state, I'm sure."
(Additional reporting by Jason Hovet, editing by Mike Peacock)
