Zloty jumps on intervention

BUDAPEST: The Polish zloty gained sharply on Monday after the central bank again stepped into the market but later lost some ground as concerns about Greece's debt problems stoked risk aversion and weaker PMI data hit regional stock markets and currencies.

Poland's central bank said it sold an "unspecified" amount of foreign currency on Monday after intervening in the previous session. It also sold forex on September 23, in what was then only its second ever intervention.

"This was the third intervention this year and the central bank may intervene more, but the effect is not spectacular, with the market retreating after the bank stopped selling euros," said Pawel Gajewski, head of FX trading at Bank Millennium.

"This shows the market is negative towards the zloty."

As a result of the intervention, the zloty the region's most liquid currency jumped around 1 percent to the euro. It later retreated amid losses on European and regional stock markets, and was 0.5 percent higher on the day at 4.3920 to the euro by 1409 GMT.

The zloty has been central and eastern Europe's worst-performing currency this year, down 10 percent. Recent uncertainty over the result of the October 9 parliamentary election has also been weighing on the Polish currency.

"The lead of the ruling party is slipping and the latest opinion polls reinforce this message," Barclays Capital said in a report. "Most likely the next government will be weaker and more vulnerable as it will be built on the support of at least three political parties.

Obviously tripartite government would not be an ideal political constellation for conducting fiscal reforms," Barclays added.

JPMorgan said in a report issued on Sept. 29 that the zloty was one of the most undervalued currencies globally, according to its long-term fair value model, along with the Mexican peso and the Turkish lira. Its model estimated fair value for the zloty at 3.62 to the euro.

The Czech crown often viewed as the region's safe-haven unit fell 0.7 percent to 24.87, while the Hungarian forint shed 0.9 percent to 295.3, briefly touching its weakest level since May 2009.

Five-year credit default swaps for Hungary and Poland each rose 10 basis points, to 540 and 306 respectively, their highest since the depths of the global crisis in early 2009.

Central banks have been scrambling to support their currencies as the global economic picture sours and the euro zone debt crisis deepens, sending investors to safer havens.

The Hungarian central bank (NBH) launched euro sale tenders on Monday to protect the forint by providing banks with foreign currency liquidity to finance foreign currency debt repayments by households under a government scheme.

"Hungarians do not have so vast FX reserves to defend the currency, hence interest rate hikes are becoming highly probable if forint stays near 300 EUR-HUF," KBC said.

Analysts have said the central bank's euro sales could help prevent a forint fall as the NBH uses its foreign currency reserves in the tenders. The mortgage repayments are seen boosting commercial banks' demand for foreign currencies in coming months.

Romania's leu firmed 0.9 percent against the euro amid talk of central bank intervention. The Romanian central bank has often intervened in the past to defend the leu.

Romania sold 298 million lei in six-month treasury bills on Monday, with the average accepted yield 6.69 percent against 6.29 percent at a May 16 tender.

The Polish government bond yield curve steepened, with short-term yields dropping and long-term yields rising a few basis points, reflecting reduced rate hike expectations as concern over economic growth hurts long-term assets.

Hungary's yield curve meanwhile flattened further, with short-term yields rising 10-15 basis points as expectations strengthened that the Hungarian central bank will increase interest rates if the forint weakens further.

Debt levels in Central Europe are lower than in states hit by the euro zone debt crisis, but the region's strong financial and trade links with the euro zone make its markets vulnerable to economic and market developments in Western Europe.

Fresh purchasing managers' index data for September signalled slowing economic activity across the region.

The Czech PMI dipped to 52.3 in September from August while Hungary's PMI at 50.8 in September was slightly higher from August but still indicated the economy is switching into a lower gear due to slowing exports and depressed domestic demand.

Poland's PMI also fell to a 23-month low in SepteReuters

Prague's equity index shed 1.5 percent by 1415 GMT, Warsaw was down 1.4 percent and Budapest lost 1 percent.

Copyright Reuters, 2011