High yields, an improvement of the macro fundamentals and good prospects for an IMF loan agreement should continue to support the Serbian currency. From a strategy perspective, we like the Serbian dinar. We strongly believe that elevated policy rate lending very good carry to the RSD, combined with a potential IMF deal will support the dinar this year. We target 108.00 on EUR/RSD from current levels in the low 112s.

The National Bank of Serbia announced today its rate decision. In line with our expectations, they decided on a +25bp hike. Good news for the RSD as it lends yet again more support to the currency. We believe that rates will eventually head to 12% by mid H1'2013. The December CPI showed a renewed acceleration to 12.2% yoy, from 11.9%yoy in November. Inflation pressures will remain elevated till the end of the agricultural season in mid-spring. From a strategy perspective, we like the Serbian dinar, and strongly believe that elevated policy rate lending very good carry to the RSD, combined with a potential IMF deal will support the dinar this year. We target 108.00 on EUR/RSD from current levels in the low 112s.

The RSD still has room for appreciation to below 110, where it should stabilise for some time. Higher interest rates and open market operations will be supportive to the RSD, as well as the improving economic growth outlook, the falling trade gap, and expectations that a start date for EU membership negotiations will be announced in H1.

Source: bne