BUDAPEST: The zloty firmed on Tuesday after the head of Poland's central bank said he would not resign over a growing scandal of leaked tapes that have rocked domestic politics and markets.
Other Central European markets, including equities and bonds, were mostly calm.
The forint firmed slightly, tracking the zloty, even though Hungary's central bank is expected to cut interest rates further at its meeting on Tuesday.
The zloty firmed 0.1 percent against the euro, continuing to recover from 3-week lows touched last week amid a slew of embarrassing secret recordings of senior Polish officials. The tapes scandal had added to an already strong sense of unease among investors over the Ukraine crisis, which threatens to hamper the region's economic recovery.
Polish government bonds also firmed, with the yield on the 10-year benchmark bond dropping 5 basis points to 3.53 percent.
Polish central bank governor Marek Belka reiterated on public radio that he would not resign after he was caught on one of the leaked tapes using expletives about central bank colleagues.
"Today's comments from Belka, that he would not resign, had a positive impact on the zloty because investors were still worried whether Poland's governor would stay," said Lukasz Kolodziejczyk, currency trader at Millennium Bank in Warsaw.
"I suppose that the zloty should strengthen now because the leaked tapes have not changed our economy's outlook too much. The zloty will also benefit from divergence between rates in the euro zone and Poland," he added.
INTEREST RATES
Central European markets, where yields are higher than in developed markets, have benefited from continued monetary easing by the European Central Bank as most central banks in the region have already finished their own interest rate cuts.
Poland's central bank is expected to keep its main rate at a record low of 2.5 percent for more than a year and to start to raise it in the third quarter of next year.
Hungary's central bank, however, is expected to plough on with its rate cutting cycle for the 23rd successive month, trimming the benchmark by another 10 basis points to a new low of 2.3 percent later on Tuesday.
The forint still firmed 0.1 percent versus the euro, while Hungarian government bonds were flat.
"The central bank rate cut will be a non-event and even the bank's statement will probably be a copy-paste of last month's comments," one Budapest-based fixed income trader said.
"Why would they say just now that they will not cut rates further, when the rand, the zloty and the forint are firming? They could stop if there is risk-off in global markets but that is not the case," the trader added.
Raiffeisen said in a note the region's debt markets would receive continued support from expectations that the low-rate environment in the euro zone would prevail.
"The generally favourable sentiment towards CEE local debt markets is also likely to help Serbia's debt managers today to issue its 2y RSD (2-year dinar) bond successfully," it added.
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