Central European currencies gained on Friday, shrugging off rising expectations of interest rate cuts and paring the week's losses on growing confidence that Spain will seek aid. Poland's zloty and the Czech crown, which had fallen as much as 2 percent versus the euro this week, led the rebound, gaining 0.3 and 0.5 percent respectively.
The Czech central bank is expected to cut interest rates to a new record low next week to stimulate demand in the country's shrinking economy but will refrain from any unconventional action, a Reuters poll showed on Friday. Analysts say looser monetary policy in the region may cap currency gains, however, with market rallies on the promise of US and European Central Bank monetary stimulus seen giving regional central banks more scope to boost domestic demand.
Central Europe's economic fortunes are closely tied to those of the neighbouring euro zone, its main export market and banking partner. "Rate cut expectations are pretty much priced into the market in the Czech Republic," said Neil Shearing, an analyst at Capital Economics.
"Added to that, rate differentials are becoming less important currency drivers than shifts in risk sentiment." The crown has strengthened less than 3 percent this year against the euro, clearly underperforming the zloty and the forint that have posted gains of 8 and 11.6 percent, respectively.
A currency dealer in Prague said he expected the crown to trade in a range of 24.600-25.000 in the near future. The crown traded at 24.817. "That range can be split, if we move below 24.800, there could be a correction to 24.600, but we are also trying to buy for a move back up," he added.
Central European stock markets rose, led by Prague with a 0.8 percent rise. The prospect of monetary easing in Poland, the region's biggest economy, could weigh on the zloty in the period ahead, SEB analysts said in a note. "Macro data points to slowing economy and markets participants continue to price rate cuts already in October," SEB said. "Lower interest rate expectations should weigh on zloty going forward even if risk sentiment improves considerably."
Forward rate agreement contracts, which show investors bets on future borrowing rates, price in a 25 basis point rate cut in the next two months and three more such cuts in the next 12 months. Poland's main interest rate now stands at 4.75 percent after a series of rate increases in the first half of 2011 and a surprise hike in May.
In the Czech Republic, where rates are already at a record low, Citigroup analysts said a further cut could not be ruled out, probably as soon as this month. "Given our more negative outlook on the foreign demand, more accommodative ECB and weaker Czech economy outlook, we think that there is still a room for cuts in the policy rate, starting with 25 bps on 27 September," Citigroup said.
"However, as we expect the koruna to ease monetary conditions we think that non-standard measures are less likely unless we see larger disinflationary pressures and a drop in economic activity," it said. Central bank policymakers in Hungary are due to meet on Tuesday, with a Reuters poll on Thursday suggesting they could pause an easing cycle due to inflation and market risks after cutting rates for the first time more than two years in August. The Monetary Policy Council, whose decision to lower rates by a quarter point to 6.75 percent caught markets off-guard, is split down the middle between four pro-growth members and three others weary of what they see as premature easing.