Forint rebounds on Greece, credit upgrade speculation

Gaining 2.07% in the last two days, it is up 0.98% versus the euro from final quotes last Friday, after losing 0.78% last week. It is up 1.61% from the end of last year, after it lost 6.12% last year, and 1.95% in 2013.

Hopes that Greece will agree a bailout with its euro zone creditors by a weekend deadline, and the continuing Chinese market recovery helped lift central European currencies to levels against the euro not seen since before Athens rejected the previous rescue terms in a referendum last Sunday.

The euro soaring against the dollar, with dollar pressure temporarily off on fading Fed rate hike fears also provided tailwind.

Central European asset prices started to rebound on Thursday as Greece presented fresh reform proposals to European officials.

The forint and Hungarian sovereign bonds have been outperforming in the region because of expectations that rating agency Moodyʼs will improve its outlook for Hungary to "positive" after the market close on Friday.

A factor might be a rush to catch risk premium yield while it is there as Hungarian government bond prices extend gains posted on Thursday when local banks, helped by cheap hedging at a central bank interest rate swap tender, scrambled to buy bonds. Euro zone periphery yields also fell on Friday, while first-rated bond prices fell worldwide.

The fixed income speculation is also probably fueled by covering for another possible disappointment on Greece, based on previous experience of Hungarian government bonds being almost immune to ups and downs of the Greek news flow, while other higher yielding assets, like euro zone peripheries, have been more volatile.

Emerging markets debt funds worldwide attracted USD 100m net inflows this week, the first inflows in seven week, while all bond funds posted USD 1.8 bln outflows, and investment-grade bond funds ended the week with USD 900mn of net outflows, Bank of America said in Friday.

Meanwhile, Morgan Stanley expects Hungary to continue its easing cycle this month, with a 10bps cut on July 21 to its 1.5% policy rate, a slower pace than the 15bps cuts in the previous months. Risks to that forecast are tilted towards a bigger cut of 15bps rather than rates on hold, though how risk trades between now and the meeting will be key to the outcome, Morgan Stanley said in a note on Friday.

The Hungarian central bankʼs latest measures to incentivize local banks to buy more government bonds make its balance sheet sensitive to future rate increases and thereby strengthens arguments for low interest rates and a weaker forint in the long term, Citigroup said in its Friday note. The central bankʼs easing cycle and liquidity-injecting measures might keep euro/forint elevated even as economic data in Hungary and Poland are likely to outperform the rest of the central European region. Therefore, Citi remains reluctant to hold duration in the Hungarian government yield curve, and sees euro/forint at 320 in the next six to 12 months, the house said.

The forint traded at 278.78 to the dollar, up from 284.99 late Thursday. On Friday, it moved between 276.96, a more than two-week high, and 285.11, after a second nearly four-month low within three days at 290.57 Tuesday intraday.

It was quoted at 296.56 to the Swiss franc, up from 300.60 late Thursday. Its range on Friday was 295.98, a more than two-week high, to 300.95, after a more than five-month low at 306.16 late last Sunday. 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, it reached the highest at 281.07 on February 26.