BUDAPEST/WARSAW: Solid economic data released last week continued to support Central European currencies on Monday, although the zloty gave up some gains after Moody's warned that a constitutional crisis could affect Poland's credit rating.
The zloty was trading at 4.2345 per euro at 1509 GMT, firmer by 0.3 percent from Friday's close, though off a 3-month high hit earlier in the session at 4.2276.
Moody's said in a statement that Poland faced heightened political risk because of a clash between the government and constitutional court that has raised worries about democracy and the rule of law in the EU's largest eastern member.
Poland's top court said last month that a government move to increase the number of judges it needs to make rulings was illegal. The ruling Law and Justice (PiS) party has faced growing criticism from the European Union, the United States and rights groups over controls on media and other institutions.
Yields on longer Polish bonds rose by 3-4 basis points. Benchmark 10-year bonds traded at a yield of 2.845 percent.
Moody's is due to review Poland's rating on May 13.
"All bidders vanished shortly after the (Moody's) statement hit the screens," said Krzysztof Bednarczyk, a bond dealer at Raiffeisen Polbank.
"A one-notch rating cut by Moody's is already priced in by the market. The reaction could be really ugly if the move is larger," he added.
The zloty shrugged off the Moody's warning but according to dealers that could reverse if sentiment sours in global markets.
"The risk appetite is so high that such information seemingly goes unnoticed. But the same thing could have heavy consequences when the market conditions change," said Marcin Turkiewicz, head of FX dealing at mBank in Warsaw.
Emerging and especially eastern European markets have been on a hot streak over the last 2-1/2 months after a torrid start to the year and 2015. It has been closely correlated with the rebound in oil but the lure of their relatively higher interest rates has also been made even stronger by a fall in the dollar, boosting the profits of dollar based investors.
Figures last week showing Poland's budget deficit unexpectedly fell below the European Union's debt ceiling last year should support Poland's credit ratings, Raiffeisen analysts said before the Moody's comments, although concerns remain about government spending pledges.
"The positive surprise in data decreases in our opinion the risk of another rating cut for Poland," the analysts said in a note, referring to a surprise downgrade of Poland's rating by Standard & Poor's in January.
The Polish and Serbian central banks meet this week and are both expected to keep interest rates on hold.
Polish flash inflation data on Friday showed prices fell 0.9 percent in March from a year earlier but recent comments by rate-setters have led to 2016 rate cuts being mostly priced out in forward rate agreements.
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