May 31 (Bloomberg) -- The forint headed for the biggest three-day retreat in 1 1/2 years and bond yields climbed on concern the Federal Reserve will cut debt purchases and Hungary’s central bank may keep lowering rates.
Hungary’s currency weakened 0.6 percent to 296.13 per euro by 1:55 p.m. in Budapest, extending the decline in the past three days to 3.3 percent, the worst depreciation for any three-day period since November 2011. The forint has gained 1.1 percent in May, the third-best performance among major currencies tracked by Bloomberg. The 10-year yield climbed to the highest in more than a month.
There’s “tectonic shift” in emerging markets on speculation when the Fed will reduce its asset purchases, Guillaume Salomon, a London-based strategist at Societe Generale SA, wrote in a research report today. The “dovish” stance of the central bank is adding to the forint’s woes, he said.
Investors should use the increased risk aversion to sell the forint and the zloty and buy euros, Salomon wrote. While central bank stimulus measures and near-zero rates in the U.S., Europe and Japan sent Hungary’s currency to its strongest level in 2013 and bond yields to record lows this month, Fed Chairman Ben S. Bernanke said last week the central bank could reduce the pace of bond purchases if there is a sustained improvement in growth.
The Magyar Nemzeti Bank reduced its benchmark rate by 25 basis points to 4.5 percent on May 28 in a 10th consecutive month of easing, saying further cuts are possible if favorable sentiment in financial markets is sustained.
The central bank is considering a way of signaling to markets principles for ending the rate-cut cycle, Deputy President Adam Balog said, state news agency MTI reported today. Policy makers have no interest-rate target, he said.
The yield on 10-year bonds jumped 20 basis points, or 0.2 percentage point, to 5.766 percent, up from a record-low 4.93 percent on May 16.
“The phenomenon isn’t country-specific,” Imre Kerekgyarto, a Budapest-based trader at Commerzbank AG, wrote in an e-mail to clients today. “A selling wave is sweeping through the whole emerging universe.”
The European Commission on May 29 recommended releasing Hungary from its excessive deficit procedure for the first time since 2004. The move, which needs the approval of European Union finance ministers at a meeting next month, will help avert the threat of cuts in development aid and would also widen the government’s policy room, Prime Minister Viktor Orban said in an Inforadio interview yesterday. Orban, who took office in 2010, faces elections next year.
Orban’s comment on the increased room to maneuver contributed to the forint weakness, according to Commerzbank.
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