The Hungarian central bank’s commitment to continue a record-long easing cycle is being challenged by investors retreating from emerging markets.
Bets for three-month interest rates in three months rose as much as 1 percentage point in the past two days, pricing in a 60 basis-point increase in the benchmark rate, forward-rate agreements show. Hungary failed to sell the planned amount of one-year Treasury bills at an auction today as yields jumped. The forint fell to its weakest against the euro in two years.
Policy makers in Budapest yesterday signaled there’s room to for rate cuts even as peers from Turkey to South Africa tightened policy. Magyar Nemzeti Bank President Gyorgy Matolcsy said that Hungary’s current-account surplus sets it apart from more vulnerable economies such as Turkey, which pushed through an emergency rate increase this week to halt a run on the lira. That may not be enough to convince investors, according to Benoit Anne, a strategist at Societe Generale SA.
“These days, the game is about positioning for investor expectations,” Anne, who heads emerging-markets strategy at Societe Generale in London, said in an e-mail today. “If the hedge funds managed to score against” the Turkish and South African banks, “there is absolutely no reason why they should not be able to score against” the Hungarian monetary authority.
The forint depreciated as much as 1 percent and traded 0.4 percent weaker at 310.35 per euro by 4:36 p.m. in Budapest. It has lost 2.1 percent in two days, the steepest slide among 24 emerging-market peers tracked by Bloomberg. The country’s sold 35 billion forint ($153 million) in 12-month bills today, less than the 50 billion forint planned, as the average yield jumped to 3.51 percent, the highest since October.
“It seems that fast money has sensed blood and is picking new victims,” Krzysztof Madej, who manages more than $250 million at Warsaw-based mutual fund Altus TF, said by e-mail today. “While they’ve learnt there’s no use fighting the” U.S. Federal Reserve or the European Central Bank, “nobody will defend emerging markets. Only higher rates can do that.”
The Federal Open Market Committee said yesterday it will cut monthly bond purchases by $10 billion to $65 billion, keeping the pace of the reduction from the previous month. Monetary-policy makers across emerging markets are weighing the Fed’s move against the need to boost economic growth.
The South African Reserve Bank unexpectedly increased its benchmark rate yesterday, following developing-economy peers who tightened monetary policy to bolster their currencies. Romania lowered its benchmark rate to a record 3.75 percent on Jan. 8, while Poland left borrowing costs unchanged this month.
A strengthening in the zloty would be a bigger concern for Poland than its retreat because the nation’s economic recovery is still taking shape and the inflation rate is low, Finance Minister Mateusz Szczurek told reporters in Warsaw yesterday.
In Hungary, the currency’s drop has been “too fast and too big” and the central bank is monitoring “very carefully” the forint’s trajectory, non-executive rate setter Gyula Pleschinger said in an interview yesterday.
Pleschinger was outvoted in each of the last five rate meetings in 2013 after urging slower cuts than the majority. The central bank slowed its rate reductions to 15 basis points on Jan. 21, lowering the benchmark to a record 2.85 percent, following 20 basis-point moves in the previous five months and 12 quarter-point cuts between August 2012 and July 2013.
“This is precisely the market situation in which overly low rates in Hungary will have their telltale result,” Tatha Ghose and Barbara Nestor, London-based strategists at Commerzbank AG, wrote in an e-mailed report today. “The rate-cut cycle could be over quickly.”
Matolcsy yesterday declined to answer questions about the forint’s drop and its impact on rate policy. The central bank didn’t answer e-mailed questions on the same subject today.
Policy makers told analysts at “prior meetings” that Hungary can tolerate depreciation “at least up to” the 330 per euro level, Phoenix Kalen, a London-based strategist at Societe Generale, wrote in an e-mailed report today, advising clients to sell the forint.
The central bank has no exchange-rate target and hasn’t done a comprehensive review on why the forint is depreciating as there is “little available information,” news website Portfolio reported today, citing Magyar Nemzeti Bank Vice President Ferenc Gerhardt.
Hungarian assets were resilient after the Fed first started to pull back stimulus as the central bank slowed the pace of rate cuts. In the past two days, the forint’s decline against the euro was the world’s fourth biggest after the Mozambique metical, the Guyanese dollar and the Malawian kwacha.
The plunge shows that investors are looking past Hungary posting the slowest inflation since 1970 and a current-account surplus of 2.4 percent of economic output, according to Gergely Palffy, an analyst at Budapest-based Buda-Cash Brokerhaz Zrt.
“Each word that supports a scenario of the central bank stopping rate cuts or maybe going higher may calm the markets and stem the forint’s drop,” Palffy said in a statement on the brokerage’s website. “If there’s no such statement, then there’s a problem and the Turkish story may come when they’ll pound the forint until the central bank gives in.”