BUDAPEST/WARSAW: The zloty and Polish stocks touched 4-week lows on Friday after Moody's issued a warning over Warsaw's tension with the European Commission, preparing investors for a possible rating downgrade.
Central European assets were mostly rangebound, with weakening bias due to concern that Federal Reserve Chair Janet Yellen will flag upcoming interest rate hikes in a speech later on Friday, which would make the region's high-yielding assets relatively less attractive.
Regional stock indices mostly dropped, led by half percent loss in Budapest.
Oil industry stocks fell, with Slovenia's Petrol shedding 0.4 percent even though it reported a rise in first-half earnings, and Warsaw's PKN Orlen losing 0.3 percent.
Regional currencies and bonds were mixed and directionless, with investors awaiting clues from a batch of US economic data due later on Friday and from Yellen's speech.
The forint, trading at 309.30 against the euro at 0859 GMT, was off the 4-month highs touched on Friday.
The zloty moved in the opposite direction, firming 0.15 percent to 4.3268 in a correction of a fall to a 4-week low of 4.3354 in early trade.
Moody's warned late on Thursday that the changes implemented by the Polish government in the constitutional tribunal threatened to raise tension with the European Union.
"Moody's is preparing its clients for a rating cut in September, due to escalation of the crisis over the constitutional court and deterioration of Moody's assessment of the growth prospects," said Jakub Borowski, chief economist at Credit Agricole Bank Polska.
"This is obviously negative for the zloty and Polish bonds," he added.
Central European states's resistance to European Commission and German proposals for distributing migrants in EU members has been another key source of tension.
Hungarian Prime Minister Viktor Orban, a staunch critic of the EU's migration policies, said on Friday that his government planned to build a second fence on the southern border to keep out migrants.
He spoke before a meeting of German Chancellor Angela Merkel with the prime ministers of the Visegrad Group - the Czech Republic, Hungary, Poland and Slovakia - in Warsaw.
"Markets are not influenced (by Orban's comments) as the tension (with Brussels and Berlin) has been continuous over that issue and this looks only a new chapter," one Budapest-based fixed income trader said.
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