Forint down on Czech data, easing expectations


The forint was trading at 319.14 to the euro late Monday on the interbank forex market, down from 317.03 late Friday and the same late Sunday. At 317.12 to the euro early Monday, the forint moved between 316.54 and 319.42, a five-day low, after it fell to a new three-year low at 321.35 on Tuesday last week.

The Hungarian currency returned to its weakening path after bad Czech retail data out Monday morning revived expectation for more monetary easing in the region. The euro's fall against the dollar, and the Russian ruble's wobble in the wake of another plunge of oil prices also weighed on the forint.

The forint's slide only slowed for a while in mid-morning, after the government sold 50% more nine-week Treasury bills than planned at another ad-hoc auction within a week with yields falling and price discount narrowing in a bid-to-cover ratio of 2.7 as opposed to 1.9 a week ago.

But, as investors see the government in a hurry to replenish liquidity and thereby to raise public debt, yields of the ten-year benchmark Hungarian sovereigns continued to rise on the secondary market, while their risk premium diminished to German Bunds with yields rising at a faster pace.

Hungary's consumer price decline likely deepened in December, to 0.8% on the year, after a fall of 0.7% in November, on lower oil prices, low inflation in the major trade partners, and also by multiple rounds of government-mandated utility price cuts, Goldman Sachs said in a note on Monday. Data is due on Wednesday. Goldman Sachs expects inflation to stay negative in the first half of this year, stabilising later, but not reaching the central bank's 3% target by early next year. This, together with increased tolerance for forint weakness, should lead to additional interest rate cuts of 50bp in total in the first half, it added.

Goldman Sachs also said one its top trade recommendations for 2015 is to go long on the dollar against a basket of the Hungarian forint and the South-African rand. The recommendation is based on its bullish dollar and long-term bearish view on the forint. It reckons the forint will continue to weaken against EUR due to Hungary's economic fundamentals such as lower potential growth and still large foreign-currency debt even following the conversion of forex mortgages into forint debts. More Hungarian interest rate cuts, which Goldman forecasts to come in the first half, would also add to the forint's weakness. "The government's policy direction of export-driven growth indicates a preference for gradual depreciation in the medium term, within the balance sheet limits imposed by the still sizeable stock of external debt," Goldman said.

Risks remain tilted toward more Hungarian interest rate cuts to come in the first half despite the central bank's intention to leave rates unchanged until the end of 2015, said Morgan Stanley. The central bank has been erring on the side of prudence when keeping rates steady in recent months. But a combination of lower-than-expected Hungarian inflation, ECB easing, and forint stabilization may prove sufficient for it to start cutting again, Morgan Stanley added.

The forint traded at 270.14 to the dollar, down from 267.72 late Friday and 267.21 late Sunday. On Monday, it moved between 266.83 early and 270.26, a five-day low, second worst only to a new more than twelve-year low at 270.75 on Wednesday last week.

It was quoted at 265.74 to the Swiss franc, down from 263.82 late Friday and 263.98 late Sunday. Its range on Monday was 263.56 to 266.00, a five-day low, after it hit another nearly three-year low at 267.36 on Tuesday last week.

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