January 3, 2018 / 2:56 PM / a year ago

CEE MARKETS-Weak dollar buoys zloty despite Polish inflation plunge

    * Polish annual CPI falls to 2 pct in Dec from 2.5 pct in
    * Polish central bank will not rush into rate hikes-analysts
    * Renewed dollar selling help zloty, forint rebound
    * Leu rebounds, Romanian stocks hit two-month high

 (Recasts with Polish figures, fresh comments)
    By Sandor Peto and Bartosz Chmielewski
    BUDAPEST/WARSAW, Jan 3 (Reuters) - The zloty rebounded on
dollar selling after an initial fall on Wednesday, even though
Poland reported a plunge in inflation which may curb bets for
central bank rate hikes late this year.
    Poland is usually the first state in the eastern wing of the
European Union to report monthly inflation figures, and the
region's inflation rates often move in tandem.
    Its inflation fell to 2 percent in December, below analysts'
2.15 percent consensus forecast, from 2.5 percent in November.
    The zloty traded steady at 4.163 against the euro
at 1400 GMT, approaching 4.1605, its strongest levels since
August 2015, reached on Tuesday.
    Initially it weakened, in tandem with the forint
and the Czech crown, but the currencies rebounded as
pressure on the dollar returned in global markets.
    Currencies in the European Union's fast growing eastern
economies often benefit from dollar selling.
    Market strategists are downbeat about the greenback's
near-term prospects on concerns that future U.S. rate hikes have
 been broadly priced into the markets. 
    Even though a strong rise in wages is a key driver of
Central Europe's robust growth, Polish inflation is likely to
remain moderate early this year, analysts said. 
    "Such significant (inflation) decrease should strengthen
current MPC (central bank) tone and bring some certainty to the
market that a potential interest rate hike... would happen later
rather than sooner," said PKO BP strategist Jaroslaw Kosaty.
    "This should support zloty weakening at some stage, but in
this moment it seems that it still faces new highs, because of a
possible EURUSD rise above 1.21," he said, adding that a dollar
rebound later this year could weaken the zloty.
    The Czech crown also rebounded, but remained
weaker by 0.1 percent from Tuesday, at 25.545 versus the euro.
    The Czech central bank has increased its record low interest
rates twice since August to defend its 2 percent inflation
target, the region's lowest.
    In the minutes of its December meeting, it quoted some of
its board members as warning over economic overheating risks.
    It repeated that the timing of further rate hikes was
conditional on macroeconomic variables, including the crown's
exchange rate.
    It added, though, that in many other countries monetary
policy was even more accommodative, "and a rising interest rate
differential could not be ignored in a small open economy".
    Elsewhere, the leu rebounded from its end-2017
record lows against the euro in its first session this year,
trading firmer by 0.3 percent at 4.635, after Romanian president
Klaus Iohannis signed the controversial 2018 budget bill.
    The Bucharest Stock Exchange index rose 1.9 percent,
hitting a 2-month high.    
            CEE       SNAPSHOT   AT                         
            MARKETS             1500 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.5450   25.5125    -0.13%    -0.01%
 crown      >                                       
 Hungary    <EURHUF=  309.1500  309.1750    +0.01%    +0.57%
 forint     >                                       
 Polish     <EURPLN=    4.1630    4.1628    -0.00%    +0.32%
 zloty      >                                       
 Romanian   <EURRON=    4.6350    4.6488    +0.30%    +0.96%
 leu        >                                       
 Croatian   <EURHRK=    7.4400    7.4605    +0.28%    -0.13%
 kuna       >                                       
 Serbian    <EURRSD=  118.5700  118.3700    -0.17%    -0.06%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1089.37  1083.650    +0.53%    +1.04%
 Budapest             39562.86  39443.57    +0.30%    +0.47%
 Warsaw                2444.12   2461.21    -0.69%    -0.69%
 Bucharest             7900.46   7753.74    +1.89%    +1.89%
 Ljubljana  <.SBITOP    794.62    806.38    -1.46%    -1.46%
 Zagreb                1838.73   1839.22    -0.03%    -0.22%
 Belgrade   <.BELEX1    754.59    759.80    -0.69%    -0.69%
 Sofia                  681.34    684.71    -0.49%    +0.57%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    0.6170    0.1410   +124bps    +15bps
   5-year   <CZ5YT=R    0.8680    0.0450   +108bps     +7bps
   10-year  <CZ10YT=    1.6940    0.0390   +125bps     +6bps
   2-year   <PL2YT=R    1.7300    0.3020   +236bps    +31bps
   5-year   <PL5YT=R    2.6320   -0.0180   +285bps     +0bps
   10-year  <PL10YT=    3.3220    0.0040   +288bps     +2bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                1.06      1.25      1.40      0.00
 Hungary                  0.08      0.13      0.18      0.03
 Poland                   1.76      1.82      1.90      1.72
 Note: FRA  are for ask prices                              

 (Additional reporting by Luiza Ilie in Bucharest; Editing by
Keith Weir)
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