Forint eases on interbank market

At 307.89 to the euro early Thursday, the forint moved between 307.83 and 310.50, after a two-month high at 306.64 late Tuesday and a six-day low at 310.75 early Tuesday.

At the regular longer-term government paper auction on Thursday growing demand welcomed the rate cut stop announced by the National Bank of Hungary on Tuesday, and yields mostly fell.

But with local banks increasingly crowding out non-resident investors, higher demand failed to prop up the Hungarian currency. It was left behind by the euro which strengthened versus the dollar following the adoption of a second batch of conditions for a new rescue programme in Greeceʼs parliament late Wednesday, and as a result of a global forex market correction attempting to preempt an overpricing of the dollar ahead of the US rate hike expected for September.

Meanwhile, expectations for Hungaryʼs rate path differ.

Hungary is likely to keep interest rates on hold "as long as possible," Citigroup said in a note on Thursday. It forecasts Hungary will keep rates unchanged until at least the fourth quarter of next year, and raise them "only very gradually" thereafter. A hawkish shift in Fed policy outlook and/or a deterioration in Hungaryʼs strong current account surplus could force Hungary to raise rates earlier, Citi said. Given that mortgages, following their conversion earlier this year from foreign currencies into the local currency, are benchmarked to the three-month Budapest Interbank Offered Rate, or Bubor, central bank rate increases may become a politically sensitive issue ahead of Hungaryʼs next parliamentary elections, due in spring 2018, Citi said.

RBS, however, reckons Hungaryʼs central bank may face a need to cut its benchmark interest rate further despite its pledge to keep the key rate unchanged at its current, record low 1.35pc "for a very long time." Should this forintʼs appreciation prove lasting and should oil prices move much lower--as RBSʼs European rates research team expects--the Hungarian central bank may find its commitment to steady rates hard to keep, RBS said in a note on Thursday.

Analysts calculate at HUF 930 bln the amount of support Hungaryʼs government has already paid out to tender winners in pre-financing against EU funds which, however, have not arrived. Two-thirds of the total may consist of funds the EU suspended or interrupted to disburse in several operative programmes pending investigations into suspected market-bending, and the rest missing as a result of regular delays in EU bureaucracy, analysts say. Anyway, the mismatch increases Hungaryʼs budget deficit, which also keeps a lid on the forint. Official figures earlier in the week showed general government deficit in Hungary jumped by nearly 60pc to HUF 813.7 bln in the first half compared to a year ago.

The forint traded at 282.36 to the dollar, slightly down from 281.75 in final quotes on Wednesday. On Thursday, it moved between 280.38, a nine-day high, and 283.05, after a one-week high at 280.62 late Tuesday and an eleven-day low at 287.19 early Tuesday.

It was quoted at 294.78 to the Swiss franc, down from 293.52 late Wednesday. Its range on Thursday was 293.25 to 295.16, after a two-month high at 292.75 Wednesday intraday. 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, it reached the highest at 281.07 on February 26.