Forint stabilises on interbank market

The forint fell for a third day for most of Monday while investorsʼ worries over the fate of Greece kept Central European currencies and government bonds under pressure.

Earlier in the day, Polish deflation coming in greater than expected in May on Monday also raised expectations for more rate cuts in the region despite the Greek turmoil and the Fed outlook.

But the Hungarian currency stabilised late afternoon after the European Central Bankʼs head said that "We know by the word of the Greek leader" that payments would be met "fully and timely," and data on a slump in US industrial production in May also helped the euro to recover against the dollar.

Later this week, investors will still closely monitor the Wednesday results of the Fedʼs next meeting for signals about the timing of a rate increase in the US widely awaited in markets. A tightening in the US could make emerging Europe sovereign yields less attractive, and pare local central banksʼ willingness to cut policy rates.

In a note on Monday, Bank of America-Merrill Lynch said the forintʼs weak course does not reflect some of Hungaryʼs fundamentals, while it repeated its projection that the National Bank of Hungary (MNB) would lower its policy rate to 1.35% by the end of the year from the present record low of 1.65%.

BofAML said a recently announced measure of the MNB that it would replace the two-week deposit with the three-month deposit as its main policy instrument from September, would support the Hungarian sovereign bond market at the shorter end, and boost the part of government bonds in financial institutionsʼ balance sheets to up to 16% from the present 14.5%.

However, the longer end could suffer as shown in foreign investors having been sellers of longer-term paper since the MNB announcement more than a week ago.

The switch at the MNB could also help create a puffer in case of a significant capital flight from Hungary, facilitating, in turn, further policy rate cuts even if the US Fed starts tightening, BofAML said.

At the same time it said more predictable MNB policies would be welcome.

Erste Bank expects the forint to recover to 310 to the euro by the end of June, but due to the MNBʼs easing bias and the authoritiesʼ probable wish the see the forintʼs course support exports, it projects a course not in the immediate vicinity of 300 to the euro until the middle of next year.

The forint traded at 277.79 to the dollar, down from 277.15 late Friday, but up from 278.73 late Sunday. On Monday, it moved between 277.44 and 279.96, a one-week low, after a six-day high at 274.80 last Wednesday intraday.

It was quoted at 296.76 to the Swiss franc, up from 299.71 late Friday and 299.91 late Sunday. Its range on Monday was 296.56 to 300.02 after a six-day low at 300.26 late Sunday evening, following a one-week high at 294.88 last Thursday intraday, and a nearly five-month low at 300.81 last Monday intraday. 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.