Forint turns around, heads down on interbank market

MNB

The forint was trading at 311.78 to the euro late Tuesday on the interbank forex market, down from final quotes at 311.61 on Monday. At 311.76 to the euro early Tuesday, the forint moved between 311.41 and 312.92, a nearly three-week low, after an eight-day high at 308.23 on Friday.

After two days of stable fare, the Hungarian currencyʼs fortune was turned to the worse single-handedly by the deputy governor of the National Bank of Hungary (MNB) who said in a news portal interview that the central bank might keep its base rate at the present record-low 1.35% until 2018 or even 2019, way beyond its end-2017 monetary policy horizon, and even if inflation accelerates to its target this side of the policy horizon. The deputy governor emphasized that negative real interest rates could thus well become part of the bankʼs toolkit to help close the negative output gap.

Negative yields on government debt became common in the last few years up to five years or more into the curve in several first-rated countries, including Germany, Switzerland, even France or Belgium, as a result of central bank easing. While this kind of discouragement has so far failed to stimulate growth in developed economies, such experimentation in junk-rated Hungary might simply frighten away investors from government financing, thus making debt financing more expensive instead of making it cheaper, without driving investments into the real economy, though both of which are the advertised aim of the MNB, analysts say.

The regular auction on Tuesday of three-month Hungarian Treasury bills saw falling demand and price, and soaring yield compared to the previous auction a week ago.

Paring losses late in the afternoon, the upside of the forint has long been capped by strengthening expectations the central bank could restart rate cuts early next year, and by surveys that show foreign investment funds are increasingly withdrawing from Hungarian government bonds, at least partly as a result of the MNB squeeze-out policy which shepherds domestic banksʼ funds into sovereign debt.

The forint traded at 282.18 to the dollar, down from final quotes at 281.83 on Monday. On Tuesday, it moved between 281.43 and 283.27, after an almost one-month low at 283.81 last Friday.

It was quoted at 286.48 to the Swiss franc, slightly down from 285.44 late Monday. Its range on Tuesday was 286.28 to 287.69, after a nearly two-month low at 290.35 and a five day high at 285.16 both 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.

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