Emerging European currencies inched higher to the euro on Friday, recovering earlier losses as the single currency also bounced back, while Hungarian debt yields were at two-month highs after Budapest said it could tap foreign markets before securing a financial aid deal.
The euro, the region's reference currency, bounced back against the US dollar in volatile trade, after an earlier bout of weakness driven by faltering global growth, and traders said the gains may be short-lived. At 1415 GMT, the Hungarian forint and Polish zloty were 0.2 percent firmer versus the euro. The Romanian leu was flat at 4.37. Shares were weaker across the region, in line with losses in emerging stocks, with Prague's leading losses at a 0.5 percent fall on the day.
Meanwhile, Hungarian government bonds rose by 14 to 20 basis points to two-month highs. The head of the Hungarian debt agency AKK said on Thursday that the country may issue a foreign currency bond even before it reaches an aid deal with the International Monetary Fund and the European Union.
"The market does not feel that Hungary would be ready for a foreign currency issue without and IMF deal," one Budapest-based fixed income trader said. "If they come out with an issue before a deal, the interpretation could be that we don't want a deal at all."
Hungary has to roll over about 4 billion euros of foreign currency debt this year. The government's pledge for an IMF deal helped the forint recover from record lows hit early this year, and government bond yields fall from peaks above 11 percent. The country's conservative government is still in dispute with Brussels over a raft of controversial legislation, blocking talks on a new financing deal which Budapest needs to shore up market confidence and bring down high borrowing costs.
"Ultimately this all depends on price. If the AKK is willing to pay something of a premium to investors to get cash in the bank, I guess the way markets are at present, they would be able to put a deal away," analyst Tim Ash at RBS said in a note. But Gyula Toth, an analyst at UniCredit said it would be "extremely challenging" for Hungary to issue before the official talks given the uncertainty about the level of commitment toward an IMF agreement.
"We think the announcement is negative for the Eurobond curve particularly for the USD curve. As the USD curve is inverted we think it is fairly pricing the potential supply risks," he said in a morning note. Elsewhere in the region, the Czech crown was a touch stronger to the euro at 24.698 after two days of falls in what traders said was a repatriation of dividends from Czech companies to their foreign parents.
David Sykora, a dealer at CSOB in Prague, said talk in the market had been that there were orders to buy 300-500 million euros with Czech crowns which had mostly been filled. "I think the main flows have been executed yesterday and the day before yesterday. There were rumours on the market of 300-500 million euros. I think so far we are close to the execution of that. You can see that on the FX rate because we have moved a figure lower (stronger crown)," he said.
On Wednesday, Skoda Auto, a unit of Germany's Volkswagen, said it would pay a dividend of 7.1 billion crowns, or 287 million euros, to its parent. Investors' focus in the region is expected to lock on central bank interest rate decision in Hungary, the Czech Republic and Romania next week.
The Hungarian bank is expected to keep rates on hold again, but cut them by half a percent over the rest of the year according to a Reuters poll. The Czech central bank was also expected to keep its key two-week repo rate at an all-time low of 0.75 percent for the rest of 2012.
By contrast, Romanian policymakers will likely cut interest rates for the fourth month running next week and once more before the middle of the year, but caution over the impact of global fuel prices and a parliamentary election may make it pause thereafter.