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UPDATE - Hungary central bank to offer fx swaps to help year-end euro liquidity

The National Bank of Hungary (MNB) said Friday it will offer euro liquidity to banks through a tender of floating-rate one-week fx swaps in a one-off move on December 27.

The move is aimed at helping banks to manage their foreign-exchange liquidity at the end of the year.

The bank also aims to prevent a large deviation of prices from realistic levels in the EUR/HUF FX swap market and to ensure that forint interest rates remain close to the Bank’s key policy rate - the central bank base rate, 7% at present - in all sub-markets of the domestic money market.

The bank said they have traced unfavourable developments on the swap market in the last few days to the close of year-end positions. This could make it more difficult for domestic banks to get access to foreign exchange through the fx swap market.

The tender will be held between 12:30 and 13:00 on Tuesday with settlement on December 28 and expiry on January 4.

The MNB will announce the volume on offer and the minimum euro interest rate (the maximum swap points) at 10 a.m. on Tuesday.

The one-off one-week tender is in addition the MNB’s existing one-day and three-month fx swap facilities, the one-day one operated daily and the three-month one once a week on Mondays.

Demand for fx swaps tends to be seasonally high by the end of the year, and is also increased by a government scheme in which retail fx mortgage borrowers can fully repay their loans at discounted exchange rates.

Demand for the three-month swaps was high from the end of October 2010 until early February this year, peaking at €410m on December 24, the last tender of 2010. The three-month fx swap stock reached an all-time high of €1.922bn at the end of 2010 as liquidity on the interbank swap market narrowed due to rising swap market spreads and seasonal factors.