Forint firm on interbank market
The forint was trading at 304.59 to the euro late Wednesday on the interbank forex market, up from 305.34 late Tuesday. Also at 305.34 to the euro early Wednesday, the forint moved between 304.37, a five-day high, and 306.60.
Along with other Central European assets, Hungarian government bonds firmed on Wednesday, tracking a sharp drop in bond yields in Germany and a light drop in the US after Fed Chair Janet Yellen suggested rate hikes are not imminent.
A rise in US interest rates would make the higher debt yields in emerging Europe relatively less attractive.
The ECB's is to start quantitative easing in March, and the outlook drives down first-rated yields in the eurozone, with negative yields catching up with the six-year tenor in Germany on Wednesday after shorter ones had sunk under the waterline weeks ago. This also makes Hungarian debt more attractive, supporting the forint.
With US yields staying low, some of the region's central banks can cut their own interest rates further to counter inflation levels around zero and to help their economies. The later the Fed hikes and the larger the impact of the ECB's rain of liquidity, the wider the space for the National Bank of Hungary (MNB), too, to ease and keep rates down for a long time without damaging the forint, analysts say.
ING reckons the Hungarian central bank won't be able to weaken the forint even though it is expected to try with a series of anticipated rate cuts in coming months. ING expects the forint to firm below 300 against the euro in the second quarter. Since any sudden deterioration in global market sentiment would only dent the forint briefly, it recommends "buying into any near-term forint weakness." Robust current account surplus, low budget deficit, strong GDP growth, expected rating outlook upgrades by Moody's and S&P will prop the forint up, and he loose monetary stance of the eurozone is making the forint an intra-Europe carry currency, ING said in a note on Wednesday.
Citigroup reckon the recent firming of the forint may validate interest rate cuts in Hungary since the country's central bank would not welcome further forint appreciation given the low inflation outlook."Therefore the room for future rate cuts may be largely determined by external factors impacting the forint versus the euro," the house said on Wednesday. Citi forecasts the scope for rate cuts is limited to 50 bps or less, which would lower the main policy rate to 1.60% by year-end from 2.1% currently. Expects the first cut between 10 bp-20 bp for March. However, the key tool to loosen monetary conditions is not rates but the MNB's Funding for Growth Scheme, which the it is to extend in mid-March, Citi added.
The forint traded at 268.20 to the dollar, up from 269.26 late Tuesday. On Wednesday, it moved between 267.90, a five-day high, and 269.51, after a four-day low at 271.03 Tuesday intraday.
It was quoted at 282.44 to the Swiss franc, up from 283.37 late Tuesday. Its range on Wednesday was 282.23, a five-day high, to 283.86. Last Thursday, at 281.75 intraday, it reached the highest 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.
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