BUDAPEST: The zloty regained some ground on Monday from the losses caused last week by domestic political turmoil, but investors remained cautious about Polish assets.
Poland, which has the region's biggest economy, has been rocked by a slew of leaked secret recordings of senior officials. The controversy continued on Monday after new transcripts emerged during the weekend.
Polish Prime Minister Donald Tusk said last week that calling an early election was an option if no other way could be found out of the crisis. Markets now await new comments from Tusk regarding the future of his cabinet.
The zloty recovered slightly early on Monday, with some investors finding the Polish currency a bargain after it lost over 0.5 percent to the euro on Friday. It was 0.1 percent higher at 0731 GMT. The Warsaw stock market also gained 0.1 percent.
"London is buying up the zloty since the morning ... We're also getting big orders from exporters for whom current levels are attractive," one Warsaw-based dealer said. "The situation on foreign markets is stable, which is taming moods in Poland a bit, (but) political risk is still present."
The zloty led losses among Central European currencies last week, after a local magazine published secret recordings of conversations between central bank chief Marek Belka and a government minister.
According to a transcript, Belka told a minister he would be willing to help the government tackle its economic problems if the finance minister were fired.
Both men have said their words were taken out of context and that they did not break the law. The recordings prompted calls from the opposition for the government to step down.
Belka, who has been generally viewed as a safe pair of hands in charge of monetary policy, has said the tapes were manipulated and he was not politically engaged.
"Everything still centres on recordings of titillating telephone conversations. The recent publications have moved attention away from comments by central bank governor Marek Belka," Commerzbank said in a morning note.
"Now it is the government in Warsaw that is in the focus. Will there be early elections? It is certainly a possible scenario."
Elsewhere, markets were off to a slow start, with the Polish political turmoil and geopolitical risks weighing on sentiment.
"Tensions between Russia and Ukraine persist, the situation in Iraq is escalating and there is this tape scandal in Poland. One by one, none of these would be able to influence the forint but added together they create negative sentiment," a dealer in Budapest said.
"Given that the forint is at relatively strong levels, we can remain within the 305-310 range unless there is a stronger shock."
The main event in Hungary this week will be Tuesday's rate meeting. The National Bank of Hungary is expected to cut interest rates another 10 basis points to a new low of 2.3 percent, according to a Reuters poll.
"We expect three more cuts to 2 percent this year and rates to remain on hold until the fourth quarter of 2015," Unicredit said.
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