Forint in steep fall versus euro

In a "business-as-not-usual" turnaround the euro took over pressuring the Hungarian currency from the dollar which has traditionally subdued the forint ever since US rate fears had strengthened.

The euro pocketed large gains against the dollar for a second day as expectations for quick action by the ECB to expand its money printing ebbed away, and the market nervously awaited a late night speech of Fed chair Janet Yellen for clues on future policy after the Fed stayed pat last week, and another round of disappointing data in the US and China followed.

On the home turf, the government cut its sale of discount twelve-month Treasury bills on rare demand, but raised the offer of a five-year floating-rate bond, in another round of non-resident investors shunning Hungarian assets, and domestic banks forcibly flocking to it, driving down yields. Analysts doubt whether Hungaryʼs financial authorities can fine-balance the need for reducing the cost of debt financing through forced self-financing to the need for yield of foreign investors still holding more than 30% of Hungaryʼs persistently junk-rated debt, both forex and forint-denominated.

However, the National Bank of Hungary (MNB) moved on Thursday the corridor around the 1.35% base rate 25bps lower as part of its efforts to squeeze more funds parked by local banks out of central bank facilities and into government debt.

MNB reduced the interest rate paid on overnight deposits to 0.1% and the interest rate to be paid on overnight credit to 2.1% "in order to enhance the efficiency of self-financing," that is to decrease Hungaryʼs external vulnerability, the bank said.

The continuation of the MNB’s self-financing programme, detailed in June, as well as the ensuing reform of the central bank instruments resulted in a material increase in credit institutions’ demand for government securities. But, while the great majority of banks’ adjustment have taken place in longer-term government bonds, also supported by the NHB’s interest rate swap (IRS) instrument, demand for short-term government securities has increased as well, which has sent the three-month government paper yield to a record low.

As a result, the yield on three-month discount Treasury bills approximated the MNB’s overnight deposit rate by mid-September, and even sank below it on certain days. This poses a risk to the continuation of the self-financing programme, as the reduction in yield differences may encourage banks to adjust through increasing the overnight deposit stock instead of raising demand in the government securities market, the MNB commented, explaining its partial rate cut, which also weighed on the forint.

The forint traded at 279.61 to the dollar, a tad down from 279.29 in final quotes on Wednesday. On Thursday, it moved between 278.11 and 280.18, after a nearly two-week low at 280.60 late Thursday, and a more than three-week high at 269.91 last Friday intraday.

It was quoted at 288.59 to the Swiss franc, down from 285.08 late Wednesday. Its range on Thursday was 284.81 to 288.66, a two-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.