Forint stabilizes versus euro and dollar

 Over last week, the forint dropped 1.34% versus the euro, after rising 0.89% in the week before.

While the euro corrected up from a fall to stable compared to the week-end against the dollar by late afternoon, the Hungarian currency stabilized versus both after a plunge last week, as European Central Bank (ECB) action to expand money printing is seen delayed even if not for long, but a US Fed rate hike looms closer, but not too close, after comments of the Fedʼs Chair last week and fresh, mixed, US data on Monday.

On the domestic scene, the National Bank of Hungaryʼs (MNB) rate meeting last week reinforced JP Morganʼs view that Hungaryʼs central bank would keep rates low for long, likely until 2018, with risks tilted toward renewed rate cuts. Besides second-round effects, potential triggers for renewed MNB easing include additional quantitative easing by the ECB, "which we see a close call," JP Morgan analysts said on Monday.

Recent measures from the Hungarian central bank to stoke local banksʼ demand for Hungarian government bonds seem to be working, UniCredit said at the weekend. Foreigners reduced their local-currency government bond holdings by HUF 31.74 bln in the week ending September 22 and by HUF 683 bln year-to-date, but this has been offset by local bank buying. Fridayʼs cut to the overnight deposit rate should boost demand for Hungarian discount Treasury bills, and the central bank measures may also prompt investors to extend duration to the belly of the yield curve, UniCredit said. 

But other analysts doubt whether domestic investors could take over from non-residents if yields go down too much to their liking.

The amount quoted by UniCredit, HUF 683 bln year-to-date, is but a fraction of Hungaryʼs gross consolidated general government debt of HUF 25,881 bln at the end of June, or even of the nearly HUF 15,000 bln outstanding in government securities at end-August.

Foreign investors still hold more than 30% of Hungaryʼs stubbornly junk-rated debt, both forex liabilities and commercial general government local currency debt. Ever-sinking yields might make them more wary, risking a void that domestic investors can only fractionally fill for lack of capital.

When affirming Hungaryʼs below-investment rating about a week ago, Standard & Poorʼs deemed the efforts for "self-financing" of Hungaryʼs central bank a source of risk. "We view increased exposure of domestic banks to sovereign debt as a vulnerability as it reduces their ability to raise exposure to government debt during times of stress..." and "the 2008-2009 global financial crisis illustrated the rapidity with which nonresidents can sell local currency bonds if investor confidence falters," S&P said.

If the bond market starts to price in increased and/or extended public asset purchases by the ECB, investors could see further yield-tightening in the central European region.

The forint traded at 281.00 to the dollar, slightly up from 281.37 in final quotes on Friday and 281.10 on Sunday. On Monday, it moved between 280.74 and 282.88, after a more than six-week low at 284.00 late Friday.

It was quoted at 288.06 to the Swiss franc, up from 288.64 late Friday, but down from 286.99 late Sunday. Its range on Monday was 286.67 to 288.90, after a nearly three-week low at 289.23 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.