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Forint back on the slope

MNB

The forint was trading at 311.35 to the euro late Thursday on the interbank forex market, down from final quotes at 309.57 on Wednesday. At 309.51 to the euro early Thursday, the forint moved between 309.34 and 311.41, a ten-day low, after a more than two-month high at 306.46 late Monday.

While emerging market mood soured globally, the Hungarian government sold a more-than-planned amount of longer-term bonds on Thursday responding to rising demand. But soaring auction yields indicated investorsʼ discontent with financing junk-rated Hungaryʼs state debt at record low returns in view of an approaching US rate hike and the outlook of rising inflation in Hungary, while the National Bank of Hungary (MNB) is expected to hold its record low policy rate well into the second half of next year as BofAML, among others, forecasted on Thursday.

Demand at the regular bond auction was not surprising as a tender of interest rate swaps (IRS) by the MNB, also on Thursday, saw a high volume of bids as well. Offers were oversubscribed and raised for the five- and the new ten-year facility that was tendered the first time on Thursday, while the three-year facility met low demand. Through IRS the central bank provides cheap hedging to local banks, undertaking duration risks, in order to increase their appetite to buy longer-term government bonds.

Hungaryʼs central bank put into place several measures last year and this year, IRS being one of them, to increase the domestic ownership of government debt against significant foreign holdings in an effort to reduce the countryʼs exposure to shifts in foreign investor sentiment.

By strengthening demand, the MNB might indeed be able to help keep low the interest burden of the state debt, but the central bank itself would incur large interest losses -- that should then be financed by the central budget as a last resort -- on the IFS, should it raise it policy rate later. Therefore, the central bank seems to be "condemned" to keep its policy rate low for an ever extending period of time, which could hurt the exchange rate of the forint and thereby cause damage to foreign investors.

Thus, however aimed at reducing Hungaryʼs vulnerability, with some 37% of Hungaryʼs foreign debt currently held by foreign investors who have no access to the IRS, any sudden deterioration in their mood might still open loopholes in Hungaryʼs financing that domestic banksʼ capability to offset is still questionable. This might lead to still rising yields and increased debt service burden of the state, exactly a development the whole operation apparently aims to avoid, analysts add.

The forint was also pressured by a government report on Thursday showing Hungaryʼs budget deficit widened in July, taking the shortfall for the first seven months to a level almost equalling the full-year deficit target. Hungaryʼs budget expenditure is traditionally frontloaded while the revenue side is rather backloaded, but this yearʼs larger deficit stems partly from diminishing payments received in EU support funds, implying lower forint demand, and from increased budget pre-financing of projects which suggests higher borrowing requirement.

The forint traded at 285.14 to the dollar, down from 283.86 in final quotes on Wednesday. On Thursday, it moved between 282.84 and 285.52, after a more than two-week low at 286.10 late Tuesday, and a three-week high at 277.00 late last Friday.

It was quoted at 290.67 to the Swiss franc, down from 289.91 late Wednesday. Its range on Thursday was 289.25 to 290.74, after a five-day low at 291.91 Wednesday intraday, and a three-month high at 288.29 last Thursday 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.


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