Polish zloty leads currency losses, wary of Iraq

The zloty led emerging central European currencies and stocks lower in a risk-off mood fuelled by escalating civil war in Iraq, while Polish inflation slowed more than forecast to fuel some monetary easing expectations. Polish inflation slowed to 0.2 percent on the year in May against April's 0.3 percent and analysts' consensus prediction of 0.4 percent, following a trend set by eastern peers Romania and Hungary.
The Polish central bank is aiming for inflation of 2.5 percent this year, and the low figure is likely to weigh on the zloty and increase pressure on the bank to cut rates. At 1250 GMT, the zloty was bid 4.1252 to the euro, down 0.27 percent on the day, followed by the forint which was down 0.1 percent to 306.49.
"There is no reaction to the data, the zloty is weakening due to global risk-off sentiment, which may be caused by Iraq. I still expect that the zloty will strength again in the next week, and levels below 4.10 per euro are still possible," said a Warsaw currency dealer. Polish analysts said the chances of the central bank cutting rates again after a pause in its easing cycle were rising, and yields slipped 4-5 basis points in late Friday trade.
"We see a high likelihood of the NBP at least deciding to revise its forward guidance to the effect that the option of a rate cut arises. That is negative for the zloty short-term," Commerzbank said in a note. The Polish bank has said it will probably keep rates on hold until September at 2.5 percent. Prime Minister Donald Tusk has said he thinks rates should stay flat in 2014 in a scenario where inflation accelerates gradually, from almost zero at the moment.
The Czech crown and the Romanian leu both shed 0.1 percent, with the latter shrugging off a postponement of an IMF review of Romania's 4 billion euro aid deal until after a November presidential election. Further south in Bulgaria, whose lev currency is pegged to the euro under a currency board regime, Standard & Poor's is expected later on Friday to release its sovereign credit rating review for the country. The International Monetary Fund said on Thursday that domestic political uncertainty and its effects on reforms and investment remained threats to a modest pick-up in Bulgaria's economy.