FX leads negative cause stocks fall in Warsaw

BUDAPEST: Emerging Europe's currencies eased on Thursday as stock markets also dropped, tracking Europe and Asia lower, but Polish long-dated bonds firmed on expectations the central bank would cut rates in the first half of 2012 to boost the economy.

The key data for investors in central Europe will be Poland's July industrial output and producer price data at 1200 GMT.

Analysts project 3.4 percent annual growth in output for July

"Yesterday's employment data from the corporate sector disappointed and the output is also likely to come in on a weak note," BNP Paribas said in a morning note.

"We expect that the reading will confirm the beginning of an economic slowdown. This would be a factor contributing to a weaker zloty," Bank BPH said in a note.

Polish 10-year bond yields fell by 7 basis points, reaching 5.62 percent, their lowest level in almost 10 months, as some investors believe the central bank will need to cut rates in the first half of next year given the slowing economy.

Forward rate agreements have started to fully price in a 25 basis point rate cut over the next seven months. Poland's key rate stands at 4.5 percent.

"As long as there is talk that the global economy is heading towards a double-dip and that the MPC will pretty soon change its stance to a dovish one, longer-term bonds have a potential for further strengthening," a Warsaw-based dealer said.

By 0920 GMT the zloty, the region's most liquid currency, eased 0.2 percent against the euro. Hungary's forint was 0.5 percent lower. The Czech crown was flat while Romania's leu was down 0.2 percent.

The region's stock markets fell, with Budapest down 2 percent, Warsaw leading losses with a 4.3 percent fall and Prague down 1.4 percent.

One dealer said the forint had underperformed its regional peers due to play in the forint/zloty cross, with some players selling forint and buying Polish zloty.

The forint traded at around 236-237 to the Swiss franc , much stronger from record lows past 271 hit earlier this month, as the franc fell on talk the Swiss National Bank was intervening in the forwards market.

This brought some relief for FX mortgage holders whose repayments have surged recently due to gains in the safe-haven Swiss franc as global markets have been volatile.

Hungarian Prime Minister Viktor Orban said on Wednesday that economic growth would only be around 2 percent this year, below a previous forecast of 3 percent, and that further measures were needed to keep the budget deficit in check.

Despite the weaker growth outlook, all 22 analysts surveyed in an Aug. 12-16 Reuters poll said the Hungarian central bank will not change its 6 percent base rate at its meeting next Tuesday, as it eyes contagion risks from the euro zone debt crisis.

HUNGARY T-BILL YIELD DROPS AT AUCTION

Hungarian bonds were broadly steady on Thursday, after a rally on Wednesday, traders said, adding that buyers were still there despite the weaker forint.

Strong demand for Hungarian paper was also indicated by a 12-month Treasury bill auction which was heavily bid. The average yield dropped 35 basis points from the last auction two weeks ago.

Romania's finance ministry will tender 600 million lei ($204.1 million) in three-year Treasury bonds on Thursday.

Analysts expect yields to rise to about 7.30 percent from 7.09 percent on July 7, which could prompt its debt managers to sell less

Copyright Reuters, 2011