Emerging FX-In ranges ahead of c.bank meetings, BOJ

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Emerging market currencies traded in ranges with a weaker bias on Monday ahead of central bank meetings in several countries and as investors waited to see if the Bank of Japan flags a rate rise early in 2007.

As dealings thin out in the run up to Christmas, focus is on central bank meetings in emerging European states, starting with Hungary later on Monday. Recent currency rallies make rate rises unlikely in any of the countries but markets want to see if policy tightening is likely in the first quarter of 2007.

The Slovak, Polish and Czech central banks will meet on Wednesday, followed by Turkey on Thursday.

"The main theme for this week is the interest rate meetings and focus is on whether we will see the end of tightening or not," said Claire Dissaux, head of emerging markets research at Calyon in Paris. "No one expects any changes now but statements and any mention of currency strength will be important."

"However, we expect more tightening in all the countries next year. The fact that the door remains open is important for the currencies," she added.

The forint was flat at 252.88 per euro after appreciating about 3 percent since Nov. 20. But recent data showed inflation at the highest in over two years, meaning rates may rise next year from 8 percent now, supporting the currency.

"We retain our call for a first quarter rate hike and our near-term bearish euro/forint view (target 251)," the Royal Bank of Canada wrote in a note.

The Slovak and Czech crowns edged off last week's record highs versus the euro as a fresh political crisis in the latter seen having only a short-term impact .

The Polish zloty was likewise flat , staying off nine-month highs hit last week. It shrugged off reports of resignation threats by Finance Minister Zyta Gilowska and the refusal by the central bank governor nominee to accept the post.

The president is expected to name a new candidate this week.

"Overriding risk appetite is the main issue here which means appreciation pressure will continue unless there are major political crises," said Gerhard Lechner, strategist at Raiffeisen in Vienna.

Lechner forecast a correction in the first quarter of 2007 but said this would likely be short-lived, first because of strong euro zone and central European growth prospects and second, because local interest rates are expected to rise.

"Strong growth propects for the region still favour currency appreciation," he said, forecasting Polish rates to rise by 25 bps at the end of March and then again by mid-year.

For the South African rand, the backdrop was mixed. The positive impact of good risk appetite being eroded by a firm dollar and gold at four-month lows but the currency is near touching distance of four-month highs above 6.95 .

In Turkey, the lira firmed slightly against the dollar, just off last week's seven-month highs. It was seen rangebound as investors waited for Thursday's central bank meeting.

Elsewhere, the BOJ started its two-day meeting. It is seen holding rates at 0.25 percent and raising them in January but markets are hoping for clues on how high rates may go next year.

The yen is a popular funding currency for carry trades but analysts play down risks, saying markets have factored in 50-75 bps of rate rises next year while U.S. rates are widely seen to have peaked, a view reinforced by soft inflation data.

"The (BOJ) impact is unlikely to be lasting," Calyon's Dissaux said. "First, many high-yield countries have tightened rates significantly compared with the majors and in places like South Africa current account deficits are already narrowing"

"Second, the U.S. is expected to have diverged from the tightening process. That reduces the Japanese rate rise impact."

[LONDON/Reuters/Finance.cz]