Forint gains against euro, falls versus dollar

The Hungarian currency accelerated gains versus the euro, rising for a fourth day in line, and fell against the dollar, as the euro dove in dollar terms after ECB President Mario Draghi hinted that the bankʼs policy stance could be reconsidered at its next meeting in March, in view of downside risks.

On the domestic front, a regular sale of 3-, 5- and 10-year government bonds was slightly supportive with average auction yields easing a bit for the first two tenors, and rising a little for 10 year amid mostly rising demand.

However, all yields were way higher from secondary market quotations, although they all rose during the day.

More important for the forint is that the auction reflected a tentative return of foreign investors following yield rises since last autumn. Domestic banks demand boosted by central bank measures drove yields down until autumn, scaring away foreign investors.

Domestic banks are apparently still reluctant to flock in again, making room for non-residents. Hungarian banksʼ wait-and-see stance was illustrated by a preceding regular interest rate swap (IRS) tender of the central bank, available only for domestic institutions for hedging against bond risk, which saw few demand for the longer tenors and allocations way short of offer.

By helping push yields down, the central bank aimed at decreasing the government debt service costs, but the flight of foreign investors resulted just in the opposite. The market now seems to slowly find a balance between lower debt costs and a necessity to lure investors while the government has increased the size of issues since the start of the year, after even reduced offers have not stemmed the yield rise in the last months of last year, and the government took higher yields in stride.

Meanwhile, the foreign holding of Hungarian government bonds remained around HUF 3,900 bln in January, after a massive fall since last April till December from around HUF 5,000 bln.

The forint traded at 290.00 to the dollar, down from final quotes at 289.61 on Wednesday. On Thursday, it moved between 287.72 and 291.18, a one-week low, after a more than two-week high at 285.80 early last Friday. On November 27, it fell to a third more than fifteen-year low within a month at 295.76.

The forint was quoted at 286.98 to the Swiss franc, up from 287.82 late Wednesday. Its range on Thursday was 286.43, a six-day high, to 288.48, after a one-week low at 289.19 Wednesday intraday, and a more than six-week high at 286.33 last Friday intraday. Since a crash to an all-time low at 378.49 to the franc on January 15, 2015, when the Swiss central bank scrapped its cap of 1.20 to the euro, it reached the highest at 281.07 on February 26, 2015.