FX little changed, market eyes upside potential

BUDAPEST: Central European currencies were little changed in early trade on Friday as markets digested a Czech rate decision from Thursday and fresh data pointed to improving fundamentals despite short-term hiccups.

That currencies were flat despite relatively adverse recent market conditions pointed to potential upside, a dealer in Budapest said, adding that the forint, the region's top performer this year, could profit from that especially.

"Investors have unwound positions in EUR/USD, equities, and even commodities, and that we have managed to avoid weakening amidst that means there is a limited scope for weakening," he said. "If the sentiment improves we can strengthen again."

At 0739 GMT, the Hungarian forint was 0.1 percent firmer, with the Czech crown and the Polish zloty up marginally. The Romanian leu dipped 0.2 percent.   The Czech National Bank left rates on hold at record lows, or 50 bps below ECB, on Thursday and sounded a dovish tone, analysts said.

Market rates, which have been pricing in a rate rise by the end of the summer, fell as a result.

"The implied beginning of the hiking cycle has been shifted from 1Q12 to 4Q11 (in the central bank's new forecasts)," ING said in a morning note. "The opinion of the dovish majority has not changed much since the last meeting."

"The crown should underperform in the coming months as dividend payments generally weigh in Q2 and the CNB remains dovish," Societe Generale said in a report.

Czech retail sales in March weakened more than expected after a strong February figure, but analysts said the overall trend was slowly improving.

In Hungary, March industrial production figures showed a steeper-than-expected decline, but analysts there also said the overall trend remained favourable.

Investors in Poland eyed state-owned bank BGK's euro sales on the market, dealers said, after the finance ministry confirmed on Thursday it had started exchanging euro-denominated EU funds for zlotys on the spot markets.

"The EUR/PLN rate is already falling in anticipation of BGK euro sales. If the bank appears on the market today we may probably reach levels around 3.94-3.95."

"Without the activity of BGK the zloty may weaken again to 3.97," the dealer added.   Romania's central bank has raised its year-end inflation forecast to 5.1 percent, well above its target, and uncertain energy prices could push it higher, Governor Mugur Isarescu said on Thursday.

Isarescu also said recent leu currency appreciation has tightened monetary policy, but warned that the central bank would not encourage high volatility nor look to curb stubborn inflation through the exchange rate in the long term.   Markets will look to comments made by the International Monetary Fund on Monday at the end of a two-week mission visit to Romania to review its new precautionary aid package.