Hungary's forint climbed to its highest in almost five months against the euro as signs US interest rates will be kept on hold stoked investor demand for higher yielding emerging market currencies.
The Hungarian forint gained with the Polish zloty and the Slovakian koruna after the Federal Reserve, which yesterday kept interest rates on hold, said inflation and growth will probably be „moderate.” Hungary has the highest interest rates in the European Union and the highest yielding bonds. „Dovish comments from the Fed have made the market bullish on high yields,” said Tania Kotsos, senior emerging markets strategist at RBC Capital Markets in London. „Hungary has the most attractive yields in the region and this is driving the forint.” Against the euro, the forint rose by the most in a week, climbing to 261.20, and was at 261.45 at 10:10 a.m. in Budapest from 263.25 yesterday. It may gain to 258 per euro within the month, said Kotsos, who recommends buying the forint.
The yield advantage offered by Hungarian bonds may prompt foreign investors to buy forint-denominated debt. The yield gap, or spread, investors demand to hold Hungarian 10-year debt rather than similar-maturity US government notes has widened to 250 basis points, compared with 214 basis points a year ago. The Budapest-based central bank this week raised Hungary's benchmark rate for a fifth consecutive month, to 8%. Kotsos expects the bank to increase borrowing costs by a further 50 basis points this year. In other trading, the Polish zloty gained 0.4% to 3.884 in Warsaw, and the Slovakian koruna climbed 0.1% to 36.38 per euro. The Czech koruna was little changed at 28.35. Czech policy makers will probably keep their interest rate unchanged today, after raising it a quarter point to 2.5% last month, a survey of economists showed. Ten out of 12 economists surveyed by Bloomberg expect no change. The other two predict an increase to 2.75%. The decision is expected around noon in Prague. (Bloomberg)