BUDAPEST: Central European currencies rebounded from multi-month lows and government bond yields retreated on Monday as investors began to fret less over the impact of a likely Federal Reserve interest rate hike this week.
Some are worried that higher US rates could reduce the appeal of risky assets in the world. But others believe that the European Union's emerging markets will receive support from European Central Bank monetary easing.
"The Fed rate hike on Wednesday is unlikely to have a big impact... as the ECB is still expected to loosen policy in the first quarter," one Budapest-based fixed income trader said.
Even before the Fed meets, Hungary's central bank is expected to launch additional unconventional measures at its meeting on Tuesday to push long-term market interest rates lower and kick-start anaemic lending.
If it does not, however, Hungarian government bonds yields could rise, the dealer said.
The country's 10-year bond yield dropped by 5 basis points to 3.58 percent even though yields across the euro zone were rising ahead of the expected first Fed rate hike in a decade.
Poland's corresponding yield dropped 6 basis points to 3.045 percent.
The forint, after hitting a five-month low against
the euro near 11-month lows on Friday, rebounded, to firm 0.4 percent by 0937 GMT to 316.10.
The zloty gained 0.3 percent to 4.35 versus the euro, off 11-month lows and the leu also firmed mildly to 4.516, staying near 11-month lows.
Concerns that new governments in Poland and Romania will create bigger budget deficits added to pressure on their currencies and bonds ahead of the Fed meeting.
Rallies in Warsaw at the weekend both in favour of and opposing the new eurosceptic government drew tens of thousands of people onto the streets, as tension rise over its appointment of new constitutional court judges who may help it carry out its fiscal programme.
Romania's parliament is expected to approve the 2016 budget later this week, sticking to a deficit target below the EU's ceiling.
But earlier this month the leftists, Romania's biggest party, said they would support a further rise in public sector wages, signaling fresh pressure on a 2016 budget already stretched by pending tax cuts and pay hikes.
Moody's changed its outlook on Romania's BAA3 ratings to positive on Saturday, which is supportive for the leu currency.
"We think the decision should change investors' perception for the better if it has the strength to surpass emotions caused by the approaching Fed decision," Piraeus Bank Romania said in a daily note.
Hungary's government announced a deep cut in the value-added tax on housing constructions to 5 percent from 27 percent over the week-end.
Erste group said in a note that the move was "welcome" as a resulting rise in construction output could offset the loss in budget revenues and help economic growth and bank lending.
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