Forint down on Greek worries

History

The forint was trading at 306.97 to the euro late Wednesday on the interbank forex market, down from 306.20 late Tuesday. At 306.12 to the euro early Wednesday, the forint moved between 305.97 and 307.43, a five-day low.

The direction of the Hungarian currency reflected new worries for Greece after the country timed a snap presidential election to this month, resulting in rising yields for peripheral and emerging debt, while the German Bund's yield hit a new historic low. Given this background, a widening of the risk premium on corresponding Hungarian sovereigns did not support the forint this time round.

It could only scrape together a small gain against the falling dollar. Meanwhile, analysts' expectations for the future course of the National Bank of Hungary (MNB) still vary.

Publishing the minutes of its latest meeting which left the base rate unchanged at record low level, MNB itself confirmed on Wednesday its intention to maintain its current loose monetary policy for an extended period of time.

With the Polish zloty near a four-month high in euro terms after the Polish central bank also stayed put at its latest rate setting meeting, and the nearside chance for an expected quantitative easing from the ECB waning, peer pressure is off MNB to cut any further soon. This comes in handy for the Hungarian government.

"We believe the Hungarian government would like to see a stronger exchange rate for debt-ratio reporting reasons at the end of the year, and the central bank may use verbal or other intervention in that direction," Commerzbank said on Wednesday.

And it should indeed, as other pressures are still felt. Citigroup cut its cash and duration overweight in local government bonds in Turkey, Poland and Hungary on Wednesday as it reckons these markets will become more nervous ahead of the December Fed meeting scheduled to December 16-17, resulting in an adverse impact particularly on high-yielding yield curves. Citi says it is back to neutral due to the expected volatility.

A poll by The Wall Street Journal saw deflation for a third month, and deepening, in November in Hungary on Wednesday, ahead of official statistics on Thursday, on lower fuel prices and government-mandated household energy price cuts. If the data come in as expected they may not fan broader deflation fears as price weakness will probably be concentrated in the energy sector. Still the country's medium-term inflation target is 3%, so the numbers may deepen expectations that the long monetary-easing cycle, which ended in July, will resume, Dow Jones commented.

Beyond year-end "you would expect the forint to weaken," a Commerzbank analyst added.

Others reckon that sustained disinflation pressures globally may result only in postponing the beginning of the first tightening in Hungary to at least until 2016, Citigroup analysts said. As for a resumption of Hungary's easing cycle, which ended in July, the forint would need to strengthen further against the euro, or household consumption recovery would need to slow, a Citigroup analyst said.

Erste Bank also forecast an unchanged Hungarian policy rate for 2015 on Wednesday at the present 2.1%.

Also on the longer-term outlook for the forint, analysts noted the MNB governor telling parliament on Tuesday that Hungary must prepare for tough times, including "external attacks" against the country's financial system next year. In Hungarian official speak a market escape from Hungarian assets is interpreted as an "attack", analysts note.

The forint traded at 247.03 to the dollar, up from 247.44 late Tuesday. On Wednesday, it moved between 246.88 and 248.48. It was quoted at 255.23 to the Swiss franc, down from 254.73 late Tuesday. Its range on Wednesday was 254.54 to 255.77, a five-day low.

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