Chief Analyst, Jakob Christensen at Danske Bank, suggests that the recent February PMI numbers released for Hungary, the Czech Republic and Poland (CEE economies) were generally quite strong. Key Quotes “The PMI increased for both Poland and Hungary to 52.8 and 54.8 (from 50.9 and 53.1 in January), respectively. In the Czech Republic, it fell slightly to 55.5 in February from 56.9 in January but remains at a high level. The strong Eastern European PMI numbers defy the trends seen elsewhere in Europe. The PMI for the euro area dropped to 51.2 from 52.3 in January, German PMI decreased to 50.5 from 52.3 in January, while the UK PMI dropped to 50.8 – a 34-month low. What is the explanation for the strong PMI numbers? Well, first of all, the economies are experiencing strong domestic growth. The Q4 GDP numbers were strong in all three countries with growth rates y/y of 3.2% in Hungary, 3.9% in Poland and 3.9% in the Czech Republic. Polish PMI number, the strongest since the new government came into power, also seems to indicate that Polish businesses do not seem overly concerned about domestic policy uncertainty. Given the exposure of Eastern European exporters, weakening growth in western Europe and a weaker euro may have a negative impact in coming months. Western Europe remains by far the most important export market for the three Eastern European economies, receiving more than half of their exports. Hence, Eastern European exporters have probably benefited from the relatively strong euro since late November. However, in recent weeks, the effective euro has weakened as the markets have started to price in more aggressive monetary policy action. The euro may weaken even further if the ECB loosens monetary policies and the euro weakens. A significantly weaker euro could weigh on the competitiveness of CEE exporters, feeding into weaker PMIs in the coming months. The CEE currencies are trading stronger, continuing the strong path since January. The zloty has strengthened by 3.5% against the euro since the political turmoil in mid-January. The HUF has also strengthened by 4.30% against the euro over that period. This trend is continuing. The CZK is trading close to the floor and the markets still seem to doubt that the Czech central bank can hold onto the peg, especially if the ECB eases aggressively.” For more information, read our latest forex news.