(Bloomberg) -- Eastern European currencies’ attempt to rebound from this week’s losses floundered as the European Commission submitted a proposal to cut funding to the countries in the bloc’s new budget period.
The European Union’s plans to cut funding to the region ended a brief recovery in the Polish zloty and Hungarian forint, which held close to the weakest levels in months against the euro following Tuesday’s thin-liquidity driven sell-off. Still, the Czech koruna rallied as Nomura International Plc recommended buying the currency before an interest-rate meeting on Thursday.
“The rally in usually quiet euro-central eastern European currency crosses has been stunning over the last week,” said Kiran Kowshik, a currency strategist at UniCredit SpA in London. “The move in all these pairs has likely been exacerbated by thin liquidity.”
The Polish zloty weakened 0.1 percent Wednesday to 4.2792 per euro, having earlier gained as much as 0.5 percent. The Hungarian forint was little changed at 314.02 per euro, after rising 0.3 percent, while the Czech koruna strengthened 0.4 percent.
Poland, which has been embroiled in a dispute with the EU over the rule of law, will see its fiscal position come under scrutiny from investors. According to the EU’s proposal presented Wednesday, the bloc would cut regional aid and tie disbursements to stricter conditions, including adherence to democratic values. Poland, the region’s largest economy, is the biggest benefactor on a nominal level in the current seven-year budget, with Hungary sporting the biggest inflow on a per-capita basis.
May Day Rout
Traders were left scratching their heads Tuesday as the exchange rates of Poland, Hungary and Turkey were pummeled even as regional markets were closed for a public holiday. The currencies slumped to the weakest levels in months as few local market makers were around to offer liquidity at a time when the dollar was surging across the board. The zloty lost 1.6 percent against the greenback, its steepest drop since October.
“Some investors have been closing long-term appreciation bets in the region against the dollar, which had been a favorite of U.S.-based hedge funds,” said Mihaly Otvos, a foreign-exchange trader at Intesa Sanpaolo’s Hungarian unit. “The moves were somewhat unexpected as we had become accustomed to the very low volatility of late.”
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