WARSAW: Central European currencies clung to gains from the previous session on Wednesday, while Polish 10-year bond yields hit their lowest in more than 5 years, supported by hopes the Federal Reserve will provide more stimulus for the US economy.
The gains in bonds bode well for a sale of 2.0-4.0 billion zlotys of 5-year debt that may also give the zloty a boost thanks to demand from foreign investors, dealers said. Results of the tender are due at 1000 GMT.
"Polish bonds are immune to both rising risk premiums in euro zone peripheral bonds as well as the latest sell-off in the German market," Bank Pekao said in a note.
"We expect solid demand from all major groups of investors (at the auction)."
The yields on 10-year paper fell as low as 5.14 percent in morning trade, and are down more than 70 basis points so far this year on the back of an improving fiscal situation of the European Union's largest eastern economy.
With public debt levels that are half or less than those of Greece or Italy and an economy that has grown consistently in recent years when most others were contracting, Polish yields as a result are significantly lower than those of the euro zone's debt-laden southern states.
But some dealers warn the rally may soon begin to flag.
"The market is pricing in nearly three interest rate cuts in Poland over the next two years, which is unjustified in my opinion. Moreover, the finance ministry is likely to pre-finance next year's borrowing needs at these yield levels," said a Warsaw-based fixed income trader.
He argued that a new bout of risk aversion due to the euro zone's still-deepening crisis could also trigger losses for emerging debt markets like Poland.
"There has been no structural solution to the euro zone debt problems and Spain's situation in likely to deteriorate further," the trader said.
Spain lurched closer to becoming the largest euro zone country yet to be shut out of credit markets when it had to pay a euro era record price to sell short-term debt on Tuesday.
CURRENCIES EYE FED
The zloty traded flat at 4.245 to the euro by 0920 GMT, while the forint gained 0.1 percent to 287.11 versus the common currency. The Czech crown was also unchanged.
"The Fed decision is key today, but I think the auction could have a positive impact on the zloty. Recently we've seen investors globally buying into emerging market debt and selling euro zone bonds," said a Warsaw-based currency trader.
The Hungarian forint hovered near six-week highs hit after gaining 1.4 percent on Tuesday on hopes that the country is getting close to starting talks about financial aid.
The Federal Reserve concludes a two-day policy meeting later on Wednesday, with expectations high that the US central bank will extend its bond-buying programme dubbed "Operation Twist".
Dealers said an extension of the programme was already priced into the market and should have little impact, but a launch of an outright third round of quantitative easing (QE3) would further support the region's currencies.
The Fed will announce its decision at 1630 GMT, with a news conference scheduled at 1815 GMT.
"If the Fed takes further action to stimulate the economy, then this will lift currencies in the region," said Marcin Turkiewicz, the head of FX trading at BRE Bank.
"But I doubt that such a move will last for a long time given the ongoing crisis in the euro zone."
The relatively robust Polish economy and hopes that Hungary's government will eventually give in and agree an aid deal with the European Union and IMF have underpinned gains for the zloty and the forint in a rollercoaster year for emerging currencies.
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