Emerging Europes currencies were mixed on Friday, in illiquid trade ahead of a long weekend which precedes a month of tough policy decisions, as pointed by inflation data earlier in the day. Hungarys forint bounced back on the weaker side of a key technical level of 290 in quiet trade dominated by a major client order.
While the Polish zloty held stronger than its 4.40 per euro resistance, but still weaker than Thursdays close. The Czech crown, the only currency in the region to firm against the euro this year as its fundamentals are healthier, edged up, while the Romanian leu resumed a month-lasting rangebound trading, interrupted by a rally on Thursday.
"This was a quiet day before Easter holidays in (most of) the region, but we cannot say there will be a resurrection for currencies when trading starts again next week, because there are too many problems everywhere," one dealer in Bucharest said.
Central and eastern Europe, hammered by a global cash squeeze, has seen its economies shrinking or slowing down sharply and its inflation easing because of tumbling domestic demand, which has prompted central banks to slash rates. But the side effect of such an aggressive easing in monetary policy was a stubborn weakening pressure on its currencies, which now threatens financial stability and indirectly pushed Hungary and Romania to seek international support.
Inflation data in Hungary and Romania on Friday had little immediate impact on the regions currencies, but opened room for new rate cuts aimed at helping ailing economies, which may add extra weakening pressure. Markets are not watching only the macroeconomic dilemma of central banks, but also the response to crisis by fresh governments in Czech Republic and Hungary and an ERM-2 entry effort in Poland.
Czech non-partisan prime minister Jan Fischer will start picking his ministers next week, while Hungarys Gordon Bajnai, who takes over on Tuesday, is expected to announce his programme to help the recession-stricken economy after Easter. In Poland, it remains unclear whether the government will try to put the zloty into the pre-euro ERM-2 mechanism this year, as originally envisaged in its euro plan.
Two Polish members of parliament quit the main opposition party, the eurosceptical Law and Justice (PiS), on Thursday, which could boost government efforts to enact a constitutional amendment allowing for eventual euro adoption. Late on Thursday Goldman Sachs wrote that the resignations were bullish for the zloty but said it was still unclear how the other small parties and independent MPs would vote.
By 1418 GMT, the forint fell 0.6 percent, the zloty weakened by 0.4 percent, while the crown firmed 0.2 percent and the leu was stable. Bond markets were also quiet. Polish paper weakened along the curve, especially at the long-end after the finance ministry announced supply for the Wednesday switch tender.
"Theres a possibility yields may go up further before the auction," said Tomasz Bielanowicz, dealer at PKO BP in Warsaw. The countrys finance ministry will offer bonds due in 2014, 2019 and 2022 at a switch tender next Wednesday in exchange for five-year DS0509 and two-year OK0709 papers maturing in 2009.
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