Central European currencies recover losses before EU summit

Central European currencies recovered some of this week's losses on Friday, led by a 1 percent rise in Hungary's forint, but investors were reluctant to take on riskier bets before an EU summit on Sunday to discuss the euro zone debt crisis. The forint was up almost 1 percent versus the euro at 297.70 while the Polish zloty rose 0.6 percent, after falls earlier in the week.
Stock markets also gained, with stocks in Warsaw rebounding 2.3 percent after being hit on Thursday by Moody's warning of a possible ratings downgrade for central Europe's largest economy. Hungary's central bank holds a rate meeting on Tuesday when it is expected to keep its key base rate at 6 percent again, following a rise in Hungarian risk premia partly due to worries over a potential ratings downgrade.
"On the basis that the forint continues to trade at around 290-300/ euro we now expect interest rates to remain at 6 percent throughout this year and next," Capital Economics said. "If the forint falls to 310-320/euros, defensive rate hikes are a realistic possibility," it added in a note.
Dealers said currencies and stocks stabilised after recent losses but that currencies would be trapped in ranges going into the EU summit until clear steps to tackle the euro zone debt crisis are agreed upon. Romania's leu ticked up 0.2 percent, while the Czech crown was up 0.4 percent off an overnight low of 25.100 per euro, its weakest since January 3.
France and Germany said in a joint statement on Thursday that European leaders would discuss a solution to the crisis at Sunday's summit but no decisions would be adopted before a second meeting to be held by Wednesday at the latest. Divisions between the two euro zone heavyweights are holding up ways to bolster the bloc's rescue fund.
Central Europe has debt levels that are at or below the EU average, but any economic slowdown in the euro zone would have a big impact on the region and threaten budget outlooks. Rating agency Moody's said it may cut the outlook on Poland's A2 rating to negative if possible slippage in the country's deficit reduction plan sparked a significant rise in the government's funding costs.
Polish central bank Governor Marek Belka challenged that view on Friday, calling it "surprising". He also played down the likelihood of an attack on the zloty toward the year-end before a key currency fixing, as a central bank colleague recently warned could happen, saying it was not a realistic scenario.
Zloty strength is important as a quarter of Polish debt is denominated in foreign currencies, making the final fixing of the accounting year key as it will determine recalculations into zlotys. A weaker zloty would mean a higher overall debt load and the risk of hitting levels that would automatically trigger harsh spending cuts.