Taking their cue from Bund prices that fell, albeit at a slowing pace, during the day, and the euro which shot up against the dollar, Hungarian longer-term sovereign yields rose on Wednesday and the Hungarian currency firmed after a recent weak spell, both attesting to fading expectations for policy rates to fall much more in the region after inflation returned to the euro zone and to Hungary as well in May.

But while fixed-income investors apparently fight to preempt negative real returns, “Hungary is aiming for negative interest rates in inflation-adjusted, or real, terms,” Nomura warned on Wednesday, citing the countryʼs steadily high current account surplus, banking sector support for domestic funding, reduced forex liability exposure and stronger growth. “The key question is if it missteps, if its diverted focus will seed vulnerability,” Nomuraʼs note said. In the meantime, it is “getting what it wants” with the forint to the euro above 300 and heading toward a suspected long-term comfort level of 325, Nomura added.

At the same time, Hungaryʼs three-month Treasury bill yields stayed near record lows around 1.2% as short-term paper remained in demand since central bank policy changes last week, replacing the two-week deposit with the three-month deposit as its main policy instrument from September, and foreign investors have been sellers of longer-term paper since then.

Due to the Hungarian central bankʼs QE-like change to its main monetary instrument and looser monetary conditions, Erste Bank projects a weaker forint versus the euro than earlier. It now sees the year-end exchange rate at 313 to the euro versus 309 before. In a note on Wednesday it stressed that forint volatility is set to increase due also to the looming Fed rate hike, which may put further downward pressure on the forint.

Hungaryʼs efforts to reduce its external debt will likely open the doors to a weaker currency, CIB Bank also said on Wednesday. Barring external shocks, Hungarian monetary conditions may remain loose for an extended period and that, together with a decline in external debt, could make the central bank more tolerant of a weaker forint, the bank said.

The forint traded at 275.56 to the dollar, up from 277.37 late Tuesday. On Wednesday, it moved between 275.13, a six-day high, and 277.27. 

It was quoted at 296.99 to the Swiss franc, up from 297.87 late Tuesday. Its range on Wednesday was 296.85, a five-day high, to 298.87, after a nearly five-month low at 300.81 Monday intraday. Since its crash to an all-time low at 378.49 on January 15 when the Swiss central bank scrapped its cap of 1.20 to the euro, it reached the highest at 281.07 on February 26.