* Currencies retreat as risk aversion rises
* Poland starts two-day rate-setting meeting
* IMF brings focus back to Latvia's economic pain
(adds detail, quote, fixed income)
By Marius Zaharia
BUCHAREST, June 23 (Reuters) - Central European currencies
weakened slightly on Tuesday when worries revived over Latvia's
chances of avoiding a devaluation, and investors pulled back
from trades favouring the Czech crown over the zloty.
The crown climbed close to a 2009 high against the euro on
Monday and to an all-time high against the zloty in indicative
pricing as investors shut down long zloty/crown positions they
had taken through euro trades.
Pessimism over Poland's budget and a safe-haven attitude
towards the less indebted Czech economy drove the position
squeeze, with dealers saying volumes in selling euro/crown and
buying euro/zloty have more than doubled from the last 3 months.
But doubts about the potential for global economic recovery
encouraged profit taking on the crown's Monday rally, while IMF
comments that Latvia was in a worse shape than expected raised
concerns the lat would have to be devalued in the longer run.
By 0942 GMT, the crown <EURCZK=> fell 0.2 percent against
the euro, the Hungarian forint <EURHUF=> dropped 0.5 percent,
while the Polish zloty <EURPLN=> traded a notch firmer, off
session lows, and Romania's leu <EURRON=> was little changed
from the previous close.
The zloty was bid at 5.7375 <PLNCZK=REU> crowns at 0942 GMT,
according to Reuters calculations.
In Poland, the central bank starts a two-day rate-setting
meeting on Tuesday, with analysts expecting a 25 basis points
cut to 3.5 percent. Czech Republic is also expected to cut a
quarter-point off its 1.5 percent interest rate on Thursday.
Hungary held rates steady at 9.5 percent as expected on
Monday, keeping the forint's higher yield [].
Analysts expect Hungary to become the economy with the
highest interest rates in the European Union next week, when
Romania is expected to chop 50 basis points off its benchmark
rate, now similar to its western neighbour's.
NOT A "DONE DEAL"
The IMF comments were "a reminder that it is not a done deal
that Latvia will automatically receive the next tranche of its
IMF loan and we would certainly not rule out renewed fears over
the situation in Latvia developing in the coming days," Danske
Bank said in a research note.
Latvia devaluation fears surged earlier this month, but
eased slightly last week when the Baltic state agreed key budget
cuts designed to secure more IMF aid.
Central European assets were hit also by data in the
region's main trading partner, Germany, whose purchasing
managers' indexes (PMI) fell for the first time in three months,
bearish news for the region's export-driven economies
[] <ECON>
Stock markets in the region fell by around 1 percent on
Tuesday. Warsaw's stock exchange <> extended its Monday
losses of around 6 percent because investors feared Poland will
use cash wrung from state-controlled companies to limit the
deepening of its budget deficit [].[]
"Polish equities are that much more vulnerable following the
latest press leaks of more possible government dividend drains,"
Chevreux said in a note.
Polish and Hungarian bonds were weaker in line with the
currencies, while Polish budget worries lingered.
"Deficit growth of around 5-6 billion zlotys is already
priced in, but a 10 billion zlotys increase would affect
long-term bonds," said one Warsaw-based dealer.
----------------------MARKET SNAPSHOT-------------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2009
Czech crown <EURCZK=> 26.088 26.046 -0.16% +2.55%
Polish zloty <EURPLN=> 4.537 4.544 +0.15% -9.3%
Hungarian forint <EURHUF=> 281.86 280.5 -0.48% -6.5%
Croatian kuna <EURHRK=> 7.272 7.27 -0.03% +1.28%
Romanian leu <EURRON=> 4.23 4.227 -0.07% -5.1%
Serbian dinar <EURRSD=> 93 93.16 +0.17% -3.78%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond CZ2YT=RR -18 basis points to 133bps over bmk*
4-yr T-bond CZ4YT=RR -20 basis points to +158bps over bmk*
8-yr T-bond CZ8YT=RR +8 basis points to +288bps over bmk*
Polish treasury bonds <0#PLBMK=>
2-yr T-bond PL2YT=RR +1 basis points to +386bps over bmk*
5-yr T-bond PL5YT=RR +1 basis points to +329bps over bmk*
10-yr T-bond PL10YT=RR 0 basis points to +301bps over bmk*
Hungarian treasury bonds <0#HUBMK=>
3-yr T-bond HU3YT=RR +27 basis points to +841bps over bmk*
5-yr T-bond HU5YT=RR +1 basis points to +769bps over bmk*
10-yr T-bond HU10YT=RR +4 basis points to +684bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1142 CET.
Currency percent change calculated from the daily domestic
close at 1600 GMT.
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(Reporting by Reuters bureaus, Writing by Marius Zaharia,
Editing by Mike Winfrey/Ruth Pitchford)
