May 25, 2018 / 9:48 AM / 10 months ago

CEE MARKETS-Assets mixed as relief rally in bonds ends, currencies fragile

    * Assets mixed after zloty, forint fall to multi-month lows
    * Euro/dollar eyed, bonds do not extend Thursday's gains
    * Leu resists pressure, trades near its firmest 2018 levels

    By Sandor Peto
    BUDAPEST, May 25 (Reuters) - Central European markets took a
breather on Friday after a recovery in bond prices in the
previous session, with the main currencies rebounding from
multi-month lows set in early trade.
    The currencies dropped in early trade before rebounding as a
continued strengthening of the dollar stopped short of the 1.17
line versus the euro.
    Its rally and a rise in U.S. 10-year yields this month have 
caused a sell-off in emerging markets, which also engulfed
Central Europe's fast-growing and mostly stable economies.
    Regional markets mostly calmed down by Thursday as the U.S.
yield retreated below 3 percent after the Federal Reserve's
minutes did not signal a pick-up in its pace to raise rates, and
have stayed there.
    But concerns remain that a possible further strengthening of
the dollar could fuel selling in emerging markets.
    The forint touched a new 23-month low against the
euro early on Friday, the zloty set a new
6-and-1/2-month low and the Czech crown approached
this year's weakest levels.
    The region's currencies were mixed at 0843 GMT, after the
dollar's firming lost steam, with the zloty trading at 4.3041
versus the euro, up a quarter of a percent, while the crown was
still weaker by 0.1 percent at 25.805.
    "In our opinion there is not much room for the further
weakening of the zloty against the euro," BZ WBK analysts said
in a note, adding though that their underlying assumption was no
more firming by the dollar against the euro. 
    The leu was steady at 4.6301 against the euro.
    The Romanian unit, which is more closely managed by the
central bank than its more liquid regional peers, has not only
weathered the global storm but even firmed this week.
    On Thursday it reached its strongest level this year apart
from one day in early January, just before the Romanian central
bank delivered its first hike in its benchmark rate in a decade.
    Since then it raised rates two more times and eyes more
tightening as inflation has risen to 5-year highs, and Romanian
government bond yields have reached 4-year highs.
    New pledges from the ruling party to maintain its wage- and
pension-boosting policy are unlikely to reverse a slowdown in
economic growth to about 4 percent, while the risk of budget
overshoots remains, market participants said.
    The central bank could slow its pace of tightening, but the
next hike may come soon, Horia Braun Erdei, Erste group's chief
economist in Romania, said in a note.
    "One such preventive hike could come in the summer, if
emerging market sentiment were to continue its current bad patch
and eventually engulf the EURRON exchange rate, which is so far
enjoying a fine strengthening ride supported by a positive
carry-to-volatility," he said.
    Government bonds in the region including Romanian papers
were mixed, not extending Thursday's retreat in yields which
helped Hungary, Poland and Romania smoothly sell the bonds they
offered at their auctions.    
            CEE       SNAPSHOT   AT                         
            MARKETS             1043 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.8050   25.7780    -0.10%    -1.02%
 crown      >                                       
 Hungary    <EURHUF=  319.6000  319.8100    +0.07%    -2.72%
 forint     >                                       
 Polish     <EURPLN=    4.3041    4.3155    +0.26%    -2.97%
 zloty      >                                       
 Romanian   <EURRON=    4.6301    4.6300    -0.00%    +1.07%
 leu        >                                       
 Croatian   <EURHRK=    7.3930    7.3940    +0.01%    +0.50%
 kuna       >                                       
 Serbian    <EURRSD=  118.1000  118.1600    +0.05%    +0.34%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1101.13  1103.420    -0.21%    +2.13%
 Budapest             36152.67  35892.62    +0.72%    -8.19%
 Warsaw                2212.23   2213.26    -0.05%   -10.12%
 Bucharest             8296.48   8264.44    +0.39%    +7.00%
 Ljubljana  <.SBITOP    901.65    905.35    -0.41%   +11.81%
 Zagreb                1847.28   1848.73    -0.08%    +0.24%
 Belgrade   <.BELEX1    742.95    744.17    -0.16%    -2.22%
 Sofia                  642.23    642.90    -0.10%    -5.20%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    0.9410   -0.0580   +157bps     -6bps
   5-year   <CZ5YT=R    1.4570    0.0500   +163bps     +7bps
   10-year  <CZ10YT=    1.9710   -0.0070   +153bps     +2bps
   2-year   <PL2YT=R    1.6150   -0.0040   +225bps     +0bps
   5-year   <PL5YT=R    2.4850   -0.0020   +266bps     +2bps
   10-year  <PL10YT=    3.2280    0.0170   +278bps     +4bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                1.04      1.19      1.32      0.90
 Hungary                  0.07      0.10      0.40      0.12
 Poland                   1.75      1.79      1.83      1.70
 Note: FRA  are for ask prices                              
 (Additional reporting by Luiza Ilie in Bucharest
Editing by Mark Heinrich)
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