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CEE markets: 2-FX pressured, Hungary’s forint touches new low

  Hungary’s forint fell to a new record low against the euro on Thursday as investors’ flight from emerging assets pressured central Europe. The Hungarian currency advanced later afternoon, the forint traded 277-279 per euro.

 

The Polish zloty plunged to 3.96 per euro, losing 4.8% from Wednesday’s local close to hit its weakest since the autumn of 2007. The Czech koruna weakened past 26 to the euro for the first time since the end of January, before paring its losses to 25.96 per euro, down 1.5% from Wednesday.

Hungary’s forint fell as low as 285.3 per euro, with flows more subdued than usual since the domestic markets were closed for public holidays on Thursday and Friday. By 1001 GMT it was bid at 281.73 to the euro, or 2% lower. An unwinding of positions has hit emerging markets this week, with Hungary taking the biggest hit in central Europe due to investors’ concern that its reliance on external financing and the health of its banks have made it vulnerable to lower inflows of foreign cash. “People are targeting higher (weaker) levels at this moment,” said a Prague dealer. “The EM (emerging market assets) are still toxic.”

In Hungary, officials said the country was close to reaching a deal with the International Monetary Fund (IMF) for financial aid. An analyst at Standard & Poor’s rating agency has said it was a positive development but that it might not be enough to avoid a downgrade of its credit ratings. In other trade, Romania’s leu fell 2% to 3.6 per euro, while Croatia’s kuna and Serbia’s dinar slipped to 7.23 and 82.84 per euro.

 

RATE HIKES, CUTS

Hungary’s central bank surprised financial markets on Wednesday by raising its interest rate by three percentage points to 11.5% to bolster the battered forint, which has lost 14.4% this month. The zloty, which is usually more stable, has shed 14.5%, while the Czech koruna has fallen 4.7% in October. On Wednesday, Czech central bank Vice-Governor Miroslav Singer said the weaker currency may limit the need to cut Czech interest rates.

Analysts were expecting another cut in borrowing costs this year after the Czechs became the first in the region to ease policy in August. “Everybody still thinks a rate cut will go through, but it’s still pretty far off given the recent moves in currencies... It’s hard to predict anything. If the koruna stays around these levels it’s probable they will cut,” a Prague bond dealer said.

In Poland the latest poll showed the central bank’s Monetary Policy Council (MPC) is expected to leave interest rates unchanged until at least the end of the year and cuts are forecast in the Q1 of 2009. “We do not expect the MPC to raise rates, as a 25 basis point hike would only cause speculative capital inflow,” BRE bank analysts said. “The most probable scenario is to leave interest rates unchanged until the Q1 of 2009.”

Czech bond markets remained illiquid on Thursday, while there was practically no trading in the Polish market. Polish bond yields rose as much as 30-60 basis points along the curve. “We’ve got a lack of liquidity. There are few buyers and the sell-off is the biggest since 2003,” said a bond dealer at Warsaw-based bank. “In such a situation the ministry should limit bonds supply and central bank should start a buyback and to become a market maker.” (Reuters)