Forint continues to fall


The forint was trading at 315.34 to the euro late Friday on the interbank forex market, down from final quotes at 314.11 on Thursday. At 314.13 to the euro early Friday, the forint moved between 313.18 and 315.77, a two-week low, after a more than five-week high at 309.05 both late Monday and Tuesday.

The forint is down 1.46% versus the euro from final quotes last Friday, after rising 0.89% in the week before. It is up 0.41% from the end of last year, after it lost 6.12% last year, and 1.95% in 2013.

Initially improving versus the euro on an abrupt turnaround of the common currency which, after two days of steep rises, dove against the dollar as US Fed Chair Janet Yellen confirmed late Thursday the eventuality of a rate hike still this year, the forint fell back again on recurrent anxiety for its future course, given the unrelenting zeal of the National Bank of Hungary (MNB) to help the government increasingly finance itself with domestic investorsʼ money and make debt financing cheaper through pushing down sovereign yields.

The MNB announced on Thursday a surprise cut in its overnight deposit rate near zero, the latest step in a series of reforms in its monetary toolkit to squeeze out funds from its deposit facilities and push banks to buy government debt and lend to companies.

As market based corporate lending is quasi moribund in Hungary for lack of demand, "the result should be further downside pressure on Hungarian rates, in particular the front end (of the yield curve), and a weaker currency," RBS analysts said in a note on Friday.

MNB deputy governor Marton Nagy told Reuters earlier this week that the bankʼs policy would focus on bringing down long-term government bond yields as well after a plunge in short-end yields to near zero in the past weeks.

Contrary to the base-line textbook scenario of lower yields suggesting higher demand that would cause a currency to strengthen, the forint eases as residents purchasing local bonds for the local currency basically do not move the forint either way while they still drive yields down, but foreign investors who would sell foreign currency to buy the forint to cover purchases become wary in view of ever sinking yields.

Analysts doubt whether Hungaryʼs financial authorities can fine-balance the need for reducing the cost of debt financing and diminishing external vulnerability through forced self-financing against the need for yield of foreign investors still holding more than 30% of Hungaryʼs stubbornly junk-rated debt, both forex and forint-denominated. For the time being they hold on to most of their bond investments with minor book-adjustments, but if at some point they bail out in mass, that would be detrimental to both the governmentʼs ability to sell debt and to the forintʼs course, as resident capital is simply not enough to take over, analyst say.

 The forint traded at 281.88 to the dollar, down from 279.70 in final quotes on Thursday. On Wednesday, it moved between 280.84 and 283.73, a more than six-week low, after a more than three-week high at 269.91 last Friday intraday.

 It was quoted at 288.82 to the Swiss franc, down from 286.84 late Thursday. Its range on Friday was 286.28 to 289.21 a nearly three-week low, after a more than six-month high at 282.23 last Friday intraday. Since its crash to an all-time low at 378.49 to the franc 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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