Forint firm vs euro and franc, down vs dollar on interbank market

MNB

The forint was trading at 305.71 to the euro late Monday on the interbank forex market, a hair down from 305.19 late Friday and 305.63 late Sunday. Also at 305.63 to the euro early Monday, the forint moved between 304.80 and 306.17 after it rose to a two-week high at 303.87 Friday intraday. It ended last week flat over the week for the second time in a row.

A late wobble notwithstanding, the Hungary currency rose on Monday for most of the day against the euro after a deal to extend Greece's financial rescue package, but uncertainties concerning Greece's readiness for required reforms, and varying expectations for monetary easing in Hungary capped the upside.

The dollar strength made the forint fell against the US currency in line with the euro and the Swiss franc.

Hungarian sovereign yields fell on the secondary market following the tentative Greek deal, also reflecting some confidence in the short term.

Hungary's ruling alliance lost its two-thirds majority in parliament after the opposition won a by-election on Sunday, but that had no impact on the forint, dealers said.

While most analysts agree Hungary's central bank will restart policy rate cuts in March, the consensus is not seamless.

There is some risk the Hungarian central bank may surprise investors by cutting interest rates this coming Tuesday, Goldman Sachs said on Monday. The central bank already has a dovish outlook and the 5.5% appreciation of the Hungarian forint against the euro since mid-January could tilt the odds, it said, although added that the most likely scenario for the central bank was still to sit on its hands on Tuesday.

Hungary would not mind a weaker forint, UBS also speculated. In Hungary, the best of trade balance expansion appears to have passed thus the central bank is likely to be more accommodative of a weaker Hungarian forint once households' foreign-currency mortgages are converted into forint debts. In a note on Monday, UBS saw USD/HUF at 260.5 on average in 2015 and 281.3 in 2016 versus 232.1 in 2014. It forecast EUR/HUF ar 310 on average in 2015 and 315 in 2016 versus 308.7 in 2014.

Meanwhile, going against the fairly large consensus from the other side, UBS expects rates to stay on hold in the first half of this year. Keeping rates steady would be the "prudent reaction" to temporarily falling prices and persisting economic strength in 2015. UBS expects Hungary to rather start raising its policy rate in the second half, with the rate ending the year at 2.5% from the present record low 2.1%. The rate hikes would come in response to pressure on the forint's exchange rate from an expected spillover from the Fed's rate hikes also penciled in for the second half, a UBS note said on Monday.

Structural factors limit Hungary's economic growth potential, while its large debt stocks continue to pose challenges, Moody's said in a comparative report on Monday, which doesn't constitute a rating action. despite an expected slow decline of the debt-to-GDP ratio it termed Hungary's risks stemming from external shocks relatively high because 40% of its total government debt is foreign-currency-denominated.

The forint traded at 269.27 to the dollar, down from 268.17 late Friday and 268.55 late Sunday. On Monday, it moved between 268.28 and 270.51.

It was quoted at 283.83 to the Swiss franc, up from 285.28 late Friday and 285.55 late Sunday. Its range on Monday was 283.70 to 285.90. Last Thursday, at 281.75 intraday, it reached the highest since its crash to an all-time low at 378.49 on January 15 when the Swiss central bank scrapped its cap of 1.20 to the euro.

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