Forint corrects up on interbank market

MNB

The forint was trading at 317.36 to the euro late Friday on the interbank forex market, up from final quotes at 317.56 on Thursday. At 317.55 to the euro early Friday, the forint moved between 316.59 and 318.06, after a more than five-month low at 318.10 late Thursday, and a four-day high at 310.92 late on Monday.

The forint is down 1.50% versus the euro from final quotes last Friday, after losing 0.22% over the week before. It is down 0.22% from the end of last year, after losing 6.12% last year, and 1.95% in 2013.

The Hungarian currency ended the week with a 0.06% technical correction versus the euro after a four-day plunge of 1.56% which drove it below its 2014 year-end level.

Along with other regional currencies, the forint dove this week in final positioning for the US Fedʼs expected tightening next Wednesday which could make the regionʼs assets less attractive. CEE currencies were also hit by the disappointingly mild easing of ECB last week.

A factor in Fridayʼs correction could have been a confirmation of its 2.5% GDP-growth projection for next year by the National Bank of Hungary (MNB). Economists expected a cut in the target figure, so the confirmation might suggest the central bank will ease less next Tuesday than it has communicated in the past weeks, analysts say.

But some easing is sure to come anyway, contributing to pressure on the forint. RBS expects Hungary to embark on new unconventional easing measures next to channel more capital to the government bond market while leaving the policy rate unchanged at its current 1.35% record low. The Hungarian central bank looks to support growth and the main policy tool to achieve that now seems to be lowering longer-dated local-currency government yields, RBS said in a note on Friday. RBS maintains the view that the central bank is implicitly aiming at a weaker currency also in a bid to propel growth.

Hungaryʼs 10-year government bond yield, however, rose 10bps to 3.73% by late afternoon on the secondary market as expectations for a rate hike in the US and investor discontent with Hungarian yields resulting from MNB policies weighed on demand.

Another burden on the forint is public debt. UniCredit expects Hungary to focus on reducing public and external debt and reviving lending in 2016 and 2017. Public debt at below 80% of GDP remains high by emerging-market standards and should fall towards 75% in the coming years, the bank said in a note on Friday. Expansion of the Paks nuclear plant and contingent liabilities from a bloated public sector will prevent a faster decline. The nuclear plant expansion alone could add about 1% of GDP per year to public debt over the next 10 years. "As a result, the budget deficit will have to be capped at 2% of GDP to reduce the debt-to-GDP ratio," UniCredit added.

Next year around EUR 5 bln of government debt will expire and if market conditions do not change it could be refinanced with forint-denominated government bonds, an official of MNB said on Friday. This prospect is also forint-negative, analysts add.

The forint traded at 289.17 to the dollar, up from final quotes at 290.11 on Thursday, in a 0.32% correction from Thursdayʼs 1.16% plunge. On Friday, it moved between 287.73 and 290.69, after a one-week low at 290.94 late Thursday, and a one-month high at 284.75 late last week Thursday. On November 27, it fell to a third more than fifteen-year low within a month at 295.76.

It was quoted at 293.26 to the Swiss franc, up from 293.57 late Thursday. Its range on Friday was 292.49 to 294.15, a more than three-month low, after a four-day high at 286.45 Monday 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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