World’s Best Currency Gain Ebbs as Rate Coup Hits Forint
The forint, the best-performing currency of 2012, is paring gains after policy makers appointed by Prime Minister Viktor Orban’s ruling party outvoted central bank President Andras Simor to cut benchmark borrowing costs.
The forint slumped the most among Europe’s emerging currencies except the Romanian leu after Hungary’s central bank lowered rates 25 basis points to 6.5 percent on Sept. 25, following a similar move in August backed by four members nominated by parliament. Intesa Sanpaolo SpA’s CIB Bank, the most accurate forint forecaster in the past six quarters based on Bloomberg Rankings, cut its forecast after the September decision.
Traders expect as much as 50 basis points of further reductions after policy makers said they need to counter the recession even as inflation picks up. Perceptions of central bank independence shifted after parliament, where Orban’s Fidesz party has a two-thirds majority, cut Simor’s salary, stripped him of the right to name rate setters and filled four of seven Monetary Council seats last year.
“The question of credibility arose for many market players after the rate decision,” Sandor Jobbagy, a Budapest-based analyst at CIB, said in a telephone interview on Oct. 3.
The central bank’s decisions are based on the country’s economic situation and risk perception and are independent of the government, the Economy Ministry’s communications office wrote in an e-mailed response to questions from Bloomberg on Oct. 1. The government doesn’t have a forint target and seeks “a stable exchange rate” that would create a “predictable environment for economic actors,” according to the ministry.
The forint weakened 0.1 percent to 283.35 against the euro by 5 p.m. in Budapest in a second day of declines. The retreat curbed this year’s rally to 11 percent, down from 14 percent before the August cut and still the best worldwide, according to data compiled by Bloomberg.
The forint’s risk reversal rate against the euro stood at minus 2.3 percent yesterday, compared with minus 2.7 percent before the rate cuts, according to data compiled by Bloomberg. The forint has the most bearish outlook for emerging-market currencies after the Brazilian real, the South African rand and the Polish zloty, the data show. A negative rate signals greater demand for forint puts relative to calls. Calls grant the right to purchase a currency, while puts allow for sales.
The currency will reach 285 per euro by the end of this year and stay around that level through the first quarter of 2013, Jobbagy said. CIB has trimmed its forecast in the past month from 283 by year-end and 281 in the first quarter.
Erste Group Bank AG reversed its bullish year-end projection for the forint to 292.5 per euro from 282.5 because of the rate cuts, Orsolya Nyeste and Zoltan Arokszallasi, Budapest-based analysts at the bank, wrote in an Oct. 3 report. Yields on the government’s 10-year local-currency bonds, which fell 180 basis points, or 1.8 percentage points, to 7.25 percent in the past four months, are likely to end the year at about 7.4 percent, Erste’s analysts wrote.
Forward rate agreements used to bet on borrowing costs in three months dropped to the lowest since September 2011 on Oct. 5 at 6.02 percent, or 54 basis points below the Budapest Interbank Offered Rate to which they settle.
Officials on the central bank’s Monetary Council outvoted Simor and his two deputies on Aug. 28 in what Peter Attard Montalto, a London-based strategist at Nomura International Plc, described as a “coup” in a research report the same day.
The central bank cut the benchmark rate by another 25 basis points on Sept. 25 to 6.5 percent, still the highest in the European Union. Hungary loosened monetary policy in the same week as the Czech central bank cut rates by 25 basis points to a record-low 0.25 percent, while policy makers in Poland said last week they may lower borrowing costs to spur slowing economic growth next month.
Hungary’s consumer prices rose 6 percent in August from a year earlier, the biggest increase since January 2010 and the most in the EU, the Budapest-based statistics office said on Sept. 11. The central bank increased its projection for price growth to an average 5 percent in 2013, above its 3 percent target, from 3.5 percent in June, the bank said on Sept. 25.
“It seems that external members are willing to accept higher inflation and a weaker forint,” Gergely Tardos and Levente Papa, Budapest-based analysts at OTP Bank Nyrt. (OTP), Hungary’s largest lender, wrote in a report on Sept. 28.
Simor said at a conference in Eger, eastern Hungary, the following day that central bank policy needs to be predictable and policy makers must show they are committed to slowing inflation. The central bank’s press office declined to comment further in response to an e-mail from Bloomberg today.
Hungary’s negotiations for International Monetary Fund assistance also have influenced the exchange rate.
The forint strengthened 0.9 percent against the euro last week, helped by the government’s announcement that it dropped a plan to impose a tax on central bank transactions that was an obstacle to obtaining IMF aid.
Goldman Sachs Group Inc. maintained its forecast for the forint to weaken to 292 per euro in three months and to 300 in 12 months, citing uncertainty over “difficult and lengthy” negotiations needed to finalize the IMF deal and government policies before parliamentary election expected in 2014, according to a research report on Oct. 5.
The forint will strengthen to 280 per euro by March 31 and 277 by the middle of 2013, according to the median forecast from a Bloomberg survey of 23 analysts.
The outcome of loan negotiations with the Washington-based lender, which have dragged on for almost 11 months, will have a bigger effect on the currency than the dynamics of the Monetary Council, according to HSBC Holdings Plc and Commerzbank AG.
“It’s a worrying signal from a monetary policy independence point of view but will be overshadowed by the effect of an IMF agreement,” Carolin Hecht, a Frankfurt-based strategist at Commerzbank, wrote in e-mailed comments.
The government used full-page advertisements in today’s newspapers in Budapest to declare it “won’t give in to the IMF” on austerity measures.
Hungary’s economy shrank 1.3 percent in the second quarter from a year earlier, after contracting 0.7 percent in the three months through March. The $140 billion economy sends more than 50 percent of its exports to the euro area, which is expected to contract this year under weight of bulging public debt and austerity, according to forecasts by the European Central Bank.
As interest rates fall, so does the attractiveness of Hungarian debt. The nation’s assets may be the first to be sold off should global sentiment worsen, Pal Saaghy, a Budapest-based currency trader at Equilor Befektetesi Zrt., said by phone yesterday.
“The National Bank of Hungary’s credibility has eroded to a high extent,” Tardos and Papa at OTP wrote, adding that they expect two more cuts in the base rate to 6 percent by year-end. “From the aspect of real interest rates, Hungarian assets will become much less attractive.”
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