CEE MARKETS 2-Currencies nose up after Draghi hints on QE, but Russian sanctions weigh

Thu Aug 7, 2014 10:21am EDT

(Adds Hungary debt auction, Serbia rate decision, updates markets)
    * Currencies regain some ground after sharp falls on Wednesday
    * Draghi's comments on QE also help boost region -analyst
    * Fallout from Russian economic sanctions feared
    * Demand strong at Hungary bond auction but yields jump
    * Serbia keeps main rate on hold at 8.5 percent as expected

    By Krisztina Than
    BUDAPEST, Aug 7 (Reuters) - Central European currencies regained some ground on Thursday after
plunging in the previous session on worries that Ukraine's crisis might deepen, but sentiment
stayed shaky as investors assessed the fallout from Russian sanctions. 
    Comments from ECB President Mario Draghi, who stressed that the ECB was ready to resort to
quantitative easing - printing money to buy securities - if the outlook for inflation fell
further, also boosted the region's currencies in late trade.
    Draghi also said that the Ukraine crisis has heightened risks to the euro zone's weak and
uneven economic recovery. 
    "Concerning the potential QE, Draghi signalled that there are a whole range of possibilities,
and as a response to that, the euro weakened, and CEE currencies firmed," said Akos Kuti, an
analyst at brokerage Equilor.
    All Central European assets have taken a beating in the past few days on rising expectations
that the U.S. Federal Reserve may be ready to raise interest rates earlier than expected, making
emerging market assets less attractive. 
    These factors added up to boost volatility in the region's currency markets. They had also
pushed up government bond yields on Wednesday in Hungary, where the central bank has carried out
an aggressive easing campaign in the past two years, slashing rates to 2.1 percent from 7 percent.
 
    Hungarian yields dropped 5-6 basis points in late trading on Thursday, helped by strong demand
at government bond auctions.
    "The auction was good," one fixed income trader said. 
    "Buying appetite returned already yesterday, higher yield levels already attracted buying. The
auction was positive news as it showed that there is still no problem with primary sales."
    But yields were higher than those at the auction two weeks ago, reflecting jitters in markets,
with the 3-year bonds sold at an average 3.63 percent, up from 3.02 percent and 5-year paper at
3.97 percent, up from 3.31 percent. 
    "Since the benchmark interest rate has been slashed and the (Hungarian) forex loans
legislation (was announced), the forint has become more vulnerable," a dealer in Budapest said.
    He said that more weakening could be on the cards but the forint might regain ground later
this year if the storm settles.
    A Reuters poll also showed on Thursday that Central European currencies are set to gain ground
in the next 12 months but by less than predicted a month ago, as economic recovery appears to be
slowing and tension in Ukraine poses risks. 
    By 1342 GMT, the forint, which on Wednesday touched its weakest levels against the
euro since January 2012 at 317.30, was 0.3 percent higher versus the euro at 314.80.
    The Polish zloty was trading 0.1 percent higher than Wednesday, while the Czech
crown was flat.
    "If nervousness on the global markets remains, we can see the zloty heading toward 4.25 versus
the euro," Pekao SA analysts said in a note.
    Russia has banned most fruit and vegetable imports from EU countries, and the Polish economy,
the largest in central Europe, could take the biggest hit from an escalation of Russia-Ukraine
conflict, if that caused sanctions to be tightened.
    Simon Quijano-Evans at Commerzbank said that while strong industry output data from Hungary
and good trade data from both Hungary and the Czech Republic indicated good demand for their
exports, the Ukraine-Russia conflict posed a significant risk.
    "Expect more positive spillover ... unless the Ukraine-Russia backdrop continues to escalate,
risking a disruption in the CEE growth story, with Poland the most exposed on the export front,"
he said in a note.
    
    SERBIA'S RATES ON HOLD
    In line with expectations in a Reuters poll, Serbia's central bank kept its benchmark rate
 on hold, with markets still waiting for the government to detail how it plans to rein
in borrowing and when it will start loan talks with the IMF.
    "I think the broader nervous global market backdrop, with EM FX selling off, and even the
Serbian dinar a little softer, ensured that the NBS (National Bank of Serbia) held pat," Standard
Bank analyst Timothy Ash said. 
    Serbia's main rate stands at 8.5 percent, way above 2.1 percent in Hungary or 3.25 percent in
Romania.
    In Hungary, investors are still assessing the impact of a new law on the country's mostly
foreign-owned banks, which forces them to pay refunds on the grounds that they have overcharged
borrowers. 
    This could cost as much as 900 billion forints to the bank sector, according to the central
bank's estimates.
    Belgian financial group KBC's said on Thursday that its profit fell by less than
expected in the second quarter as higher net interest income and increased loans and deposits
partly made up for a hit in Hungary.
    But KBC also said that a 231 million euro provision to cover the consequences of the new
Hungarian act on retail loans had weighed on results in the April-June period. 
    Even the Czech crown, considered as a safe haven in the region, could not escape the effect of
rising geopolitical risks and stayed below 28 to the euro - its weakest since March 2009.  
    "Should Russia itself impose any sanctions aimed at weakening the EU economy this could cause
the Czech central bank to ease its monetary policy," Commerzbank said in a note.
    The region's equities mostly eased. Budapest led the fall with its main stock index 
shedding 0.9 percent by 1233 GMT.   
 *                                                            *
 **************** CEE MARKETS SNAPSHOT AT 1542 CET ************ 
 ************************* CURRENCIES *************************
                            Latest  Previous   Daily   Change  
                            bid     close      change  in 2014 
 Czech crown                 27.800    27.785   -0.05%  -1.68% 
 Hungary forint             314.800   315.820   +0.32%  -5.66% 
 Polish zloty                 4.194     4.197   +0.07%  -1.06% 
 Romanian leu                 4.439     4.441   +0.04%  +0.47% 
 Croatian kuna                7.653     7.647   -0.08%  -0.46% 
 Serbian dinar              117.030   116.975   -0.05%  -2.16% 
 Note: daily change calculated from previous close at 1800 CET 
 **************************** STOCKS **************************
                            Latest   Previous  Daily   Change  
                                     close     change  in 2014 
 Prague                       952.03   949.62   +0.25%  -3.53% 
 Budapest                   17237.00 17346.55   -0.63%  -5.98% 
 Warsaw                      2334.63  2362.27   -1.17%  -2.90% 
 Bucharest                   6958.31  6964.16   -0.08%  +7.42% 
 Ljubljana                    799.46   798.34   +0.14% +24.72% 
 Zagreb                      1809.06  1803.23   +0.32%  +1.61% 
 Belgrade                     602.06   596.34   +0.96% +09.15% 
 Sofia                        540.00   539.86   +0.03% +09.89% 
 ***************************** BONDS **************************
                        Yield    Yield    Spread     Daily     
                        (bid)    change   vs Bund    change in 
 Czech Republic                                      spread    
   2-year                0.219    -0.026   +020bps    -3bps    
   5-year                0.599    -0.018   +033bps    -1bps    
  10-year                1.467    -0.009   +037bps    +0bps    
 Hungary                                                       
   3-year                3.780    -0.090   +376bps    -9bps    
   5-year                4.120    -0.150   +385bps   -14bps    
  10-year                5.120    +0.018   +402bps    +2bps    
 Poland 
   2-year                2.390    -0.020   +238bps    -2bps  
   5-year                2.902    -0.072   +263bps    -7bps  
  10-year                3.376    -0.053   +228bps    -5bps  
 ******************* FORWARD RATE AGREEMENTS ******************
                            3x6     6x9    9x12 3M interbank
 Czech Rep                    0.360   0.385  0.385   0.35 
 Hungary                      2.320   2.440  2.610   2.15 
 Poland                       2.335   2.285  2.295   2.67 
 Note: FRA quotes are for ask prices 
 **************************************************************
 

 (Reporting by Jason Hovet in Prague/Michal Janusz in Warsaw; Editing by Louise Ireland)
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