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Growth outlook buoys currencies, inflation data weighs

Growth outlook buoys currencies, inflation data weighsBUDAPEST/WARSAW: Central European currencies were mostly steady on Tuesday after lower-than-expected Hungarian and Romanian consumer price data underpinned that inflation remains anemic in the region.

China’s unexpected devaluation of its currency also raised the prospect of weaker global commodities prices, which would reduce inflation pressure in Central Europe.

That also helped push up bonds across the region but some stock prices fell, tracking global equity markets as investors worried about the implications of China’s move, which was designed to support its slowing economy and exports.

Hungary’s annual inflation rate slowed to 0.4 percent in July, from 0.6 percent in June, and Romania’s eased to 1.7 percent, from 1.6 percent in July.

These figures follow 0.5 percent inflation in the Czech Republic, and Polish figures due on Thursday are expected to dip deeper into negative territory, with a 0.8 percent decline .

Central banks in the region are still not expected to restart monetary easing as the US Federal Reserve could start to lift its own rates next month, making assets in emerging markets relatively unattractive.

Second-quarter economic output figures due on Friday are expected to show continuing robust growth mostly above 3 percent in the region but slower than in the first quarter.

“I don’t think that the (Hungarian) central bank would react to this (inflation figure) by saying that they will resume rate cuts,” one Budapest-based fixed income trader said.

Greece’s bailout deal with creditors was another factor helping sentiment in the bond market along with China’s devaluation.

“China (yuan devaluation) will leave an imprint on commodity prices, which will be seen in inflation expectations, both in Poland and in Europe and this is positive for bonds,” said Michal Burek, analyst at Raiffeisen Polbank in Warsaw.

Poland’s 10-year bond yield dropped 6 basis points to 2.94 percent. Hungary’s corresponding yield fell 9 basis points to 3.57 percent.

Hungary’s forint and equities underperformed regional peers.

The Budapest bourse’s main stock index shed 0.9 percent by 1356 GMT, but has still gained 35 percent this year, easily outperforming most bourses in the region and the world.

The Hungarian forint eased 0.4 percent against the euro to 312.55, after hitting a one-month low at 312.76, while the Polish zloty firmed 0.1 percent.

Dealers saw no clear explanation for the forint’s weakening other than an illiquid market exaggerating FX moves.

Several investors started to sell the forint for the zloty on Monday when the Hungarian unit hit a four-month high, bid at 73.90 versus the Polish unit, one dealer said.

Copyright Reuters, 2015

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