Forint firms on interbank market in the wake of Fed chair testimony

The Hungarian currency changed direction late afternoon from slow drift to some gains against most major currencies after the Senate testimony of Fed chair Janet Yellen suggested the Fed was still not scrambling to raise rates.

Earlier the forint was subdued after the National Bank of Hungary's (MNB) guidance issued midday Tuesday fueled expectations that it might begin cutting its policy rate in March. For the time being, it left its rate unchanged at 2.1%.

Later the Fed hikes, longer the space for the MNB to ease and keep rates down without damaging the forint, analysts say.

Forecasters see more argument than just deflation to explain MNB's apparent easing bias.

The Hungarian central bank will expand its subsidized loan programme to small firms from mid-March, to try and boost the pace and quality of improvement in corporate lending, particularly to small firms, SocGen reminded market players on Tuesday. This "goulash-style, pseudo-QE" will likely weigh on the forint, both over the short and medium term. The lower the main monetary policy rate, the lower the cost of the program for the central bank and vice versa, meaning that the central bank's "profitability considerations raise the threshold that any future rationale for hiking would need to meet," the house said.

The forint was also underpinned by the regular Tuesday auction of three-month Treasury bills with falling yields and rising demand compared to a week ago.

Morgan Stanley prefers Hungary's local-currency government bonds over those of Poland. Poland and Hungary continue to have negative CPI readings while economic growth in both countries is still resilient, it said in a note on Tuesday. Given that inflation in these countries is driven by external factors,cutting interest rates to weaken the currency could be one of the options to export deflation, Morgan Stanley said. With forecasting 60  bp and 75  bp rate cuts in Hungary and Poland, respectively, and 30  bp and 65  bp, respectively, priced in by the market, Morgan Stanley prefers Hungarian bonds to Poland's.

The forint traded at 269.44 to the dollar, up from 269.73 late Monday. On Tuesday, it moved between 268.89 and 271.03, a four-day low.

It was quoted at 283.63 to the Swiss franc, in line with 283.62 late Monday. Its range on Tuesday was 283.25, a four-day high, to 285.05. 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.