Forint Weakens Most in Three Months on Monetary Easing Outlook
The forint plunged the most in three-months on bets the central bank will cut the benchmark interest rate for a fifth time this year tomorrow and ease monetary policy further in 2013.
The forint depreciated as much as 1.7 percent and was 1.5 percent weaker at 288.1 per euro by 5:45 p.m. in Budapest, the biggest daily decline since Sept. 6 to the weakest level since Sept. 7. Yields on the government’s 10-year bonds were up two basis points, or 0.02 percentage point, to 6.47 percent after falling to a 2 1/2 year low of 6.44 percent last week, according to data compiled by Bloomberg.
The central bank has cut its benchmark rate by 1 percentage point since August to 6 percent as rate-setters appointed by the government outvoted Magyar Nemzeti Bank President Andras Simor. All 19 analysts surveyed by Bloomberg project another 25 basis point cut tomorrow to 5.75 percent. The central bank’s new leadership, which will take office after Simor’s term expires in March, will be allied with the government in boosting economic growth, Economy Minister Gyorgy Matolcsy said in a radio interview on Dec. 15.
Prime Minister Viktor Orban’s cabinet “will make sure the central bank will be fully aligned with the government’s policy,” Luis Costa, a London-based strategist at Citigroup Inc., wrote by e-mail today, adding that the forint was “poised” to slump against the euro.
The government may ask the new head of the central bank to limit the amount commercial banks can buy in two-week bills and make the central bank buy debt on the secondary market, hvg.hu reported last month, citing unidentified people in Orban’s ruling Fidesz party.
The yields on Hungary’s euro-denominated bonds fell to the lowest in seven weeks after Matolcsy said the government may stay away from international debt markets again in 2013.
Yields on the notes maturing in 2019 dropped 11 basis points, or 0.1 percentage point, to 5.35 percent, the lowest since Nov. 1, according to data compiled by Bloomberg.
Hungary scrapped plans to issue foreign-currency bonds this year as the forint and local-currency debt were among the best performers in the EU and the government expected to conclude aid talks with the International Monetary Fund.
“Investor sentiment needs to be great and forint-based issuance to rise further for Hungary to be able to avoid Eurobond issuance next year,” Zoltan Arokszallasi, an analyst at Erste Group Bank AG, wrote in a research report today.
State-owned Export-Import Bank Zrt. sold $500 million in bonds this month, which the government said was a “test” ahead of a possible sovereign issuance. Yields on dollar-denominated securities due in 2021 plunged 22 basis points to 4.92 percent today, the least since Dec. 5, data compiled by Bloomberg show.
Local-currency borrowing costs may rise next year if Orban stays away from foreign-currency debt markets, said Erste’ Arokszallasi and Akos Kuti, an analyst at broker Equilor Befektetesi Zrt.
“It would put pressure on the forint bond market, which may lift yields,” Kuti wrote in a research report today. “It would also increase supply on the forint market, so the currency would suffer too.”
The forint plunged more than 15 percent in the second half of 2011 after Orban nationalized privately managed pension assets and forced banks to take losses on foreign-currency loans, costing the nation its investment-grade credit rating.
Hungary’s currency rebounded 9 percent this year as Orban sought a “safety net” from the IMF and as bond buying by central banks in the U.S. and Europe boosted demand for higher- yielding assets.
“We are certainly not confident that it is happy days for the forint given Hungary’s serious structural and political problems,” Lars Christensen, a Copenhagen-based analyst at Danske Bank A/S (DANSKE), wrote in a research report today.
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