Forint up on interbank market

The forint firmed in line with other Central European currencies on increased risk-taking in global markets. Longer term risks, however, seem to be biased to the downside. The government is interested in a strong forint by end-2014 to decrease the debt-to-GDP ratio, but the artificial strength of the Hungarian currency is expected to diminish in the first quarter next year while policymakers likely want to see a weakening in the first half once households are not affected by forex risk any more, ING said in a note on Tuesday.

Economy Minister Mihály Varga said on Sunday that the forint could weaken further, and dealers say his comments had bolstered expectations that slowing economic growth and deflation, if it protracts, might force the central bank to cut its policy rate some more despite it finishing a two-year easing cycle in July.

Morgan Stanley sees room for monetary policy easing in both Hungary and Poland. Recent downside surprises in inflation in these countries have been in part attributed to external factors,

which a weaker exchange rate may help address, Morgan Stanley said in a note on Tuesday. Still, the extent to which the Polish zloty and Hungarian forint may weaken versus the euro will be heavily dependent on ECB policy, which may be more aggressive than Hungarian and Polish policy, it added.

Expectations for further rate cuts, however, fueled a return of demand for the short end of the Hungarian sovereign curve. Tuesday's auction of discount three-month treasury bills attracted a rarely seen four-fold oversubscription, with falling yields, underpinning the forint for the day. Discount three-month treasury bills are the shortest instruments available to non-residents since the central bank withdrew its two-week bills in August, replacing it with two-week deposits unavailable to non-residents.

The development counterbalanced the effect of a narrowing risk premium on Hungarian sovereigns to German and US papers at both ends of the curve on Tuesday in the secondary market.

The forint traded at 243.66 to the dollar, up from 246.31 late Monday. On Tuesday, it moved between 243.49 and 246.20. It was quoted at 254.29 to the Swiss franc, up from 255.13 late Monday. Its range on Tuesday was 254.19, a four-day high, to 255.15.