By Sebastian Tong
LONDON, June 2 (Reuters) - The unexpected magnitude of
Slovakia's 15-percent upward revaluation of its crown last week
may tempt some speculative plays on currency gains in other euro
zone aspirants but analysts warn against what may seem like
one-way bets.
Other EU convergence economies will allow their currencies
to strengthen further to fend off inflationary pressures but
will be constrained by a desire to keep their export industries
competitive in the face of faltering global growth.
Slovakia raised the value of its crown last Wednesday,
sparking off a rally in the free-floating currencies of European
Union peers -- the Czech Republic, Hungary, Poland and Romania.
These countries saw their currencies rise between 0.3 and
1.7 percent versus the euro even though none is expected to join
the euro as soon as Slovakia, which is due to adopt the single
European currency in 2009.
Although Slovakia's revaluation suggests the European
Central Bank would back these countries if they decided to let
their currencies climb before euro adoption, analysts say other
foreign exchange gains will be limited by economic fundamentals.
"Slovakia's strong level of entry into euro is near fair
value for the currency because Slovakia has made huge
productivity gains in the last few years. Other countries may
not be able to make the same argument," said Claire Dissaux,
global strategist at Millennium Global.
INFLATION IS NOT ENOUGH
Slovakia boosted the crown's <EURSKK=> central parity in the
European Exchange Rate Mechanism (ERM-2) to 30.1260 per euro,
saying this would help maintain macroeconomic stability in the
run-up to it becoming the 16th member of the euro zone.
Though few expected its early timing or size, investors had
bet on a strong conversion rate for the crown as Slovakia --
like the EU's 26 other members -- is grappling with inflation.
"It's important to note that the revaluation did not happen
due to inflation alone. Slovakia moved closer to what its
equilibrium value was estimated to be," said Millennium's
Dissaux.
The Czechs, the Polish and the Hungarians need to
restructure their economies -- including improving labour
mobility as well as industrial and agricultural productivity --
before joining the monetary union and will ensure their
currencies remain competitive in the meantime.
None of these currencies are in the ERM-2 exchange rate
regime -- required for at least two years before euro adoption.
Poland's zloty <EURPLN=> has gained nearly 7 percent versus
the euro since the start of the year while the Czech crown
<EURCZK=> has risen 6 percent.
"We're already beginning to hear complaints from exporters
in the Czech Republic and Poland," notes Lars Christensen,
Copenhagen-based Head of New Europe Research at Danske.
The Hungarian forint's <EURHUF=> comparatively modest gain
of 5 percent in the year-to-date could mean that it is poised to
outperform its regional peers in the coming months.
"The credibility of Hungary's central bank has improved with
the recent rate hikes and the market is taking a positive view,"
said Goldman Sachs analyst Istvan Zsoldos.
He sees the forint rising to 225 against the euro in the
next 12 months, up from its current 240 levels, and expects
gains in the Czech crown to be curbed as inflationary pressures
in the country abate.
Regional currencies will also consolidate in the coming
weeks as foreign companies traditionally repatriate their
earnings around summer, Zsoldos said.
"We could see about 2-3 billion euros leave each country as
part of this process."
Slovakia's revaluation is not fuelling appreciation
pressures in every euro zone aspirant.
EU Baltic members Lithuania, Estonia and Latvia, which have
their currencies pegged to the euro, are unable to revalue their
currencies due to their large current account deficits.
"The economic imbalances of these economies mean that the
market is unlikely to be convinced they have the ability to
support a strong exchange rate to the euro," said Raffaella
Tenconi, an economist for Eastern Europe, Middle East and Africa
at Dresdner Kleinwort.
(Reporting by Sebastian Tong; Editing by George Obulutsa)
