(Adds bonds, updates currency levels)
By Karolina Slowikowska
WARSAW, July 27 (Reuters) - The zloty and the forint
strengthened on Monday, extending last week's gains ahead of
rate-setting meetings this week, with the Polish currency
expected to strengthen further, supported by its solid economic
fundamentals.
At the same time, bonds were stable in Hungary and the Czech
Republic, while Polish paper, particularly on the shorter-end of
the curve, were a touch weaker.
The zloty <EUROPLN=) was 0.2 percent up since Friday's close
against the euro, the Hungarian forint <EURHUF=> was also up 0.2
percent, while the Czech crown <EURCZK=> was 0.2 percent weaker,
but still hovering around an almost 8-month high.
The improvement in sentiment in Poland was building for much
of July, when a series of better-than-expected macroeconomic
data were released, such as industrial output and retail sales,
prompting even the most dovish central bankers to say rates
would stay unchanged for months to come.
Other central European currencies have also been gaining in
recent days, in line with stocks and bonds, as appetite for risk
grew and financing conditions improved after successful taps
into international markets by Poland and Hungary.
"The zloty has been the laggard in CEE currencies for some
time. We have been advising investors to look into zloty upside
for a few months now, based on the fact that the Polish economy
is expected to fare better than the regional counterparts," said
Roderick Ngotho, EMEA strategist at UBS in London.
"The market seems to have woken up to the view that zloty
looked cheap compared to currencies backed by poorer
fundamentals such as Hungary's forint. We should see the zloty
show better upside in risk appetite sessions than has been the
case for many months."
Even talk of possible ruling coalition trouble in Poland,
signalled by Deputy Prime Minister Waldemar Pawlak, failed to
dent investors' positive sentiment.
For the region as a whole, investors also shrugged off
EBRD's warning from last Friday that the region may not return
to high growth rates and record investment levels it enjoyed
before the global crisis began to take its toll. []
"On the chart 264 looks like a strong support so it may even
firm there," a currency dealer said. "The forint continues to
drift in the world, where sentiment is very supportive and
interest rates are also high."
BONDS
Investors now awaited the Hungarian interest rate decision
and the U.S. new home sales data for June, both due later on
Monday, as well as the Polish interest rate decision on
Wednesday.
On Wednesday, the Polish central bank is also due to make
its monthly rate decision, but it is widely seen holding fire
and dealers said this may have little if any impact on the
markets.
Hungarian bonds were stable in early trade and a Reuters
poll of analysts showed last week Hungary's central bank would
cut rates by 50 basis points as consolidation in the country's
markets has opened room for trimming the highest rate in the EU.
[]
Polish bonds were a touch weaker.
"Two-year bonds were getting expensive the fastest. But we
will soon have a tender (Aug. 5) and it is natural that the bond
will get cheaper before the auction," said Remigius Zalewski,
fixed income dealer at BRE Bank.
Dealers said this was because of concerns that the growing
optimism and improving outlooks, globally and domestically, may
mean inflationary pressures ahead and force the central bank to
switch its focus back to price stability from growth.
Poland's inflation remains much above the central's bank's
2.5 percent target despite the sharp slowdown.
"Also, if it turns out that the worst in the global economy
is already behind us, inflationary problems could intensify. And
Polish policymakers already clearly stated that rate cuts are
over," he added.
Analysts and dealers say the positive sentiment may stay a
while, although they admit risks remain for the region.
They say market players were aware of possible trouble in
Latvia, a dark cloud hanging over the region's markets, but that
for now a significant part of the risk was already priced in.
Latvia, the European Union country worst hit by the
financial crisis, has already made savage public sector pay and
benefits cuts. Its economy is expected to contract 18 percent
this year.
----------------------MARKET SNAPSHOT-------------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2009
Czech crown <EURCZK=> 25.51 25.454 -0.22% +4.87%
Polish zloty <EURPLN=> 4.183 4.189 +0.14% -1.63%
Hungarian forint <EURHUF=> 266.93 267.24 +0.12% -1.27%
Croatian kuna <EURHRK=> 7.335 7.308 -0.37% +0.41%
Romanian leu <EURRON=> 4.203 4.209 +0.14% -4.49%
Serbian dinar <EURRSD=> 93.12 92.96 -0.17% -3.91%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond CZ2YT=RR -4 basis points to 143bps over bmk*
4-yr T-bond CZ4YT=RR -35 basis points to +144bps over bmk*
8-yr T-bond CZ8YT=RR -6 basis points to +272bps over bmk*
Polish treasury bonds <0#PLBMK=>
2-yr T-bond PL2YT=RR -9 basis points to +365bps over bmk*
5-yr T-bond PL5YT=RR -4 basis points to +286bps over bmk*
10-yr T-bond PL10YT=RR -4 basis points to +264bps over bmk*
Hungarian treasury bonds <0#HUBMK=>
3-yr T-bond HU3YT=RR -29 basis points to +699bps over bmk*
5-yr T-bond HU5YT=RR -62 basis points to +607bps over bmk*
10-yr T-bond HU10YT=RR -50 basis points to +505bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1021 CET.
Currency percent change calculated from the daily domestic
close at 1600 GMT.
(Reporting by Reuters bureaus, writing by Karolina Slowikowska;
Editing by Toby Chopra)
