Forint firms on bond auction results

In opposite direction to the Budapest stock exchange which fell on Fed uncertainty and the possible economic repercussions of a European row about Hungaryʼs asylum policy, the Hungarian currency suddenly strengthened versus both the euro and the dollar, a rare occurrence, as investors scrambled to buy, instead of Hungarian shares, discount three-month Treasury bills at a regular auction, with diving yields.

However, the forint remained far from attempting a breakout of its worse-than-310 range since middle-August to the euro.

Traders said banks are eager to get short-term investment instruments in view of the global and domestic uncertainties and before Hungaryʼs central bank shifts next week to three-month deposits from the two-week deposit facility as its main interest rate.

The changes encourage banks to buy government debt even though the Fed is expected to start rate hikes in the next months, if not already on Thursday, traders told Reuters.

Also at play should be other measures of the central bank which shepherd domestic banks into longer-term Hungarian sovereigns with incentives open only to resident institutions, causing non-residents to flock to the short end while they are also excluded from parking money at the central bank since last year when the bank had replaced its two-week bills with the two-week deposit which is unavailable to foreigners. Therefore, demand or lack of it for short-term government paper can make a difference for the forint that auctions for longer-term paper can hardly any more.

Also, bets are still on the table that S&P would upgrade the outlook on Hungaryʼs rating to "positive" from "stable" when it reviews Hungaryʼs junk rating on Friday, after the rating agencies have disappointed Hungaryʼs government, eagerly expecting an upgrade to investment level, at every review so far this year.

The forint traded at 276.95 to the dollar, up from 277.19 in final quotes on Monday. On Tuesday, it moved between 275.67 and 277.88, after a more than three-week high at 275.13 late Monday.

It was quoted at 284.10 to the Swiss franc, up from 285.87 late Monday. Its range on Tuesday was 283.88, a more than five-month high, to 286.67. 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.