Forint Drops First Time in Week as Recession Spurs Rate Cut Bets

The forint weakened for the first time in more than a week and yields fell to a three-year low at a Treasury-bill sale as Hungary’s recession deepened and inflation slowed, fueling speculation for interest-rate cuts.

Hungary’s currency fell from the strongest in a month in the biggest plunge among major currencies worldwide after reports showed gross domestic product fell 2.7 percent in the fourth quarter from a year earlier, the most in three years. Inflation cooled to 3.7 percent in January, the lowest since September 2011. Traders increased on bets on rate cuts to the highest in a month.

“The bleak data and heightened expectations of further rate cuts have clearly weakened the forint today,” Annika Lindblad, a Helsinki-based analyst at Nordea Bank AB, wrote in e-mailed comments. “Dismal, the only word that properly describes Hungary’s GDP data.”

The forint depreciated 0.8 percent to 292.34 per euro by 4 p.m. in Budapest and 1.7 percent versus the dollar. Borrowing costs fell to the lowest since May 2010 at the auction of 75 billion forint ($342 million) of 12-month bills, 50 percent more than planned, according to the Debt Management Agency in Budapest.

The Magyar Nemzeti Bank has lowered the benchmark rate by a cumulative 1.5 percentage points since August to 5.5 percent, the lowest level since 2010.

Rate Bets

Forward-rate agreements fixing interest in 12 months fell eight basis points, or 0.08 percentage point, to 4.33 percent, the lowest intraday level in almost three years. The FRA contracts traded 112 basis points below the Budapest Interbank Offered Rate, the widest spread in a month.

The forint tumbled about 11 percent versus the euro in 2011, its worst performance since records began in 1999, after Prime Minister Viktor Orban’s government levied special taxes on companies, nationalized privately managed pension fund holdings and forced banks to take losses on foreign-currency loans to shore up the public finances.

The currency rebounded from an all-time low on Jan. 5 last year, recovering 62 percent of its losses from 2011, as near-zero rates in the U.S. and Europe boosted demand for riskier assets and Orban took steps to cut government debt.

The nation slipped into its second recession in four years as spending cuts damped demand, a drought cut agricultural output and the euro region’s debt crisis weakened demand for exports. The 2.7 percent contraction in the fourth quarter was more than the 1.9 percent decline predicted in a Bloomberg survey of economists.

Unpredictable Policies

Hungary’s “unpredictable” economic policies expose the country to changes in risk appetite, Matteo Napolitano, a London-based director at Fitch Ratings, said in a statement today.

Fitch rates Hungary at BB+, one step below investment grade, with a stable outlook, as the country can access international debt markets and can finance itself through next year, Napolitano said. “However, the medium-term growth outlook is weak,” he said.

The forint rallied in the five days through yesterday as the government raised $3.25 billion in its first sale of foreign bonds in 21 months, after getting $12 billion in bids.

“The forint has had a little jerk up here because they came to market and raised some money, but I don’t think that changes the fundamental situation,” Jan Dehn, co-head of research at Ashmore Investment Management Ltd., said in an interview in London yesterday. “Hungary is going to struggle with growth.”

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