Hungarian forint approaches all-time low, bond auction eyed

The value of the forint has fallen sharply. (Reuters pic)

BUDAPEST: The Hungarian forint fell to a new three-and-a-half year low versus the euro on Thursday, underperforming compared to its regional peers, as the impact of the central bank’s message on Tuesday flagging an eventual end to its ultra-loose policy was fading.

Investors will closely watch a biweekly government bond auction at 11.30am local time, after Hungarian yields had soared in the past few weeks leading up to the central bank’s Tuesday meeting.

At 10.35am local time, the forint traded 0.6% lower against the euro, losing all its gains posted in the wake of a pledge by the National Bank of Hungary to firmly focus on inflation, while keeping main rates on hold.

The forint on Thursday approached its all-time low hit in early 2015.

The central bank will hold its regular monetary policy interest rate swap tender later in the day, injecting
liquidity into markets, which is aimed at supporting the local bond market.

“We expect that the NBH will be reluctant to scale down liquidity injections by FX swaps in the short term in order to support local bond markets and avoid further rise in interbank rates hurting borrowers with floating rates,” Citibank analysts said in a note.

“Therefore, risks are pointing towards a weaker FX as the HUF remains an attractive funding currency but a gradual adjustment in HUF rates may eventually follow if the inflation outlook moves permanently higher.”

In its fresh inflation report released on Thursday, the central bank discussed three alternative macroeconomic scenarios in addition to its baseline expectation, and two out of those alternative scenarios would require tighter monetary policy.

The Hungarian bank has been one of the most dovish in Europe, keeping its rates at record lows, while the Czech and Romanian central banks had already started tightening.

But on Tuesday the Hungarian bank said loose monetary conditions could no longer prevail until the end of its policy horizon, for the first time flagging an end to an era of cheap money.

A bond trader in Budapest said he expected sufficient demand for the bonds at the auction where a new 5-year benchmark will also be offered by the debt agency.

Hungary offers a total of 50 billion forints worth of government bonds at the auction.

“It seems that for the time being, in the market the 2-3 year segment had come under selling pressure,” he said. “The market is testing the central bank.”

Hungary’s 10-year bonds were trading at a yield of around 3.46% on Wednesday, a far cry from levels of
around 2% at the start of the year.

Some traders and analysts said a large bond expiry due on June 22 could provide support to the local bond market which has been under pressure from big supply as the debt agency pushed
issuance in the first half of 2018 to fund a larger-than-expected budget deficit. The deficit rose due to a pre-financing of EU-funded development projects.