May 24, 2016 / 9:36 AM / a year ago

CEE MARKETS-Zloty falls further as EU-Poland tensions flare

* Zloty weakest since February, EU's Timmermans in Warsaw
    * Worries over tension with EU weighs on Polish assets
    * Forint near multi-month low, 15 bp rate cut seen

    By Sandor Peto
    BUDAPEST, May 24 (Reuters) - The zloty hit a 3-1/2-month low
against the euro on Tuesday as tensions flared between Warsaw
and Brussels about the rule of law in Poland. 
 
    Other Central European currencies were mostly flat.
    The forint steadied near 4-and-1/2-month lows
ahead of Hungarian central bank meeting where it is expected to
cut rates but may signal the end of easing.
    The zloty traded at 4.454 versus the euro at 0810
GMT, down 0.35 percent.
    But Serbia's dinar firmed after the central bank
revised its forecast for economic growth to 2.25-2.5 percent
from 1.8 percent, citing rising investments and exports.
 
    European Commission deputy head Frans Timmermans visits
Warsaw on Tuesday to discuss changes to Poland's constitutional
court that have raised concerns.
    Polish assets including the zloty have been under pressure
for weeks with added worry over a bill that would see banks
footing the bill for the conversion of Swiss franc mortgages.
    Piling on the negatives, the finance ministry said on Monday
that it planned to impose a new tax on retailers, plans for
which have already drawn heavy criticism from Brussels.
 
    "In comparison to PLN (zloty) we would see more short-term
recovery potential for the HUF (forint)," Raiffeisen analysts
said, noting that they expected the Hungarian central bank to
make its final rate cut for this cycle at its Tuesday meeting.
    Analysts almost unanimously forecast in a Reuters poll last
week that the bank would cut its 1.05 percent base rate by 15
basis points. The poll saw about 50 percent odds for one more
cut before the easing cycle ends. 
    Hungary received its first investment grade credit rating
since 2012 from Fitch on Friday.
    The move, which surprised many investors, pushed the forint
to its weakest levels since Jan. 12 because it generated
expectations for more monetary easing.
    Several scenarios are possible at the meeting now, including
a bigger-than-expected rate cut to finish the easing cycle or a
smaller reduction, possibly coupled with signals for further
cuts or monetary easing through less orthodox measures.
    "I do not think that any of the scenarios could shock the
market," one Budapest-based fixed income trader said.
    Hungarian government bond yields, following a retreat after
the ratings upgrade, changed little on Tuesday.
    If the central bank ends its rate-cut cycle, that could
limit the gains of short- and medium-term Hungarian debt, but
the market will get a boost if Moody's also upgrades Hungary's
rating in a review in July, market participants said.
          
         CEE    SNA   AT  1010      
         MARKE  PSH  CET         
         TS     OT               
                CURRENCI            
                ES               
                Lat  Pre  Daily  Cha
                est  vio         nge
                     us          
                bid  clo  chang  in
                     se   e      201
                                 6
 Czech   <EURC  27.  27.  -0.01  -0.
 crown   ZK=>   034  031      %  13%
                  0    0         
 Hungar  <EURH  316  316   +0.0  -0.
 y       UF=>   .89  .96     2%  71%
 forint          00   50         
 Polish  <EURP  4.4  4.4  -0.35  -4.
 zloty   LN=>   540  385      %  40%
 Romani  <EURR  4.5  4.5  -0.10  0.0
 an leu  ON=>   184  140      %   1%
 Croati  <EURH  7.4  7.4   +0.0  1.9
 an      RK=>   943  955     2%   3%
 kuna                            
 Serbia  <EURR  122  122   +0.0  -1.
 n       SD=>   .71  .78     6%  01%
 dinar           00   00         
 Note:   calcu  pre  clo  1800      
 daily   lated  vio  se   CET    
 change  from   us   at          
                STO                 
                CKS              
                Lat  Pre  Daily  Cha
                est  vio         nge
                     us          
                     clo  chang  in
                     se   e      201
                                 6
 Prague         877  874   +0.3  -8.
                .53  .83     1%  24%
 Budape  <.BUX  265  263   +0.7   +1
 st      >      75.  68.     9%  1.1
                 39   25          0%
 Warsaw  <.WIG  182  181   +0.5  -1.
         20>    8.6  8.9     3%  64%
                  1    7         
 Buchar  <.BET  639  638   +0.1  -8.
 est     I>     4.0  5.8     3%  71%
                  9    9         
 Ljublj  <.SBI  706  709  -0.42   +1
 ana     TOP>   .09  .05      %  .43
                                   %
 Zagreb  <.CRB  170  169   +0.0   +0
         EX>    0.1  8.8     8%  .62
                  3    1           %
 Belgra  <.BEL  619  621  -0.33  -3.
 de      EX15>  .55  .59      %  81%
 Sofia   <.SOF  439  438   +0.1  -4.
         IX>    .18  .64     2%  71%
                BON                 
                DS               
                Yie  Yie  Sprea  Dai
                ld   ld   d      ly
                (bi  cha  vs     cha
                d)   nge  Bund   nge
                                 in
 Czech                           spr
 Republ                          ead
 ic                              
         <CZ2Y  -0.  -0.   +051   +0
 2-year  T=RR>  001  005    bps  bps
         <CZ5Y  0.1  -0.   +050   +1
 5-year  T=RR>   45  002    bps  bps
         <CZ10  0.5    0   +034   +1
 10-yea  YT=RR   15         bps  bps
 r       >                       
 Poland                             
         <PL2Y  1.5    0   +210   +0
 2-year  T=RR>   97         bps  bps
         <PL5Y  2.3  -0.   +271   +1
 5-year  T=RR>   59  002    bps  bps
         <PL10  3.1  0.0   +293   +2
 10-yea  YT=RR   03   04    bps  bps
 r       >                       
         FORWA  RAT  AGREEMENT      
         RD     E                
                3x6  6x9  9x12   3M
                                 int
                                 erb
                                 ank
 Czech   <CZKF  0.2  0.2   0.23    0
 Rep     RA><P    8    4         
         RIBOR                   
         =>                      
 Hungar  <HUFF  0.9  0.8   0.89  1.0
 y       RA><B    3    8           8
         UBOR=                   
         >                       
 Poland  <PLNF  1.6  1.6  1.582  1.6
         RA><W   75    3      5    7
         IBOR=                   
         >                       
 Note:   are                        
 FRA     for                     
 quotes  ask                     
         price                   
         s                       
 ***********************************
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 (Additional reporting by Jakub Iglewski in Warsaw; Editing by
Louise Ireland)

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