Forint Drops First Day in Four on Stimulus; Yields Fall at Sale

The forint weakened for the first time this week on speculation the U.S. Federal Reserve may slow the pace of bond purchases that boosted demand for higher-yielding assets. Yields fell at a Hungarian bond auction.

Hungary’s currency depreciated after minutes of the Fed’s Jan. 29-30 meeting sparked concern the U.S. may curtail stimulus measures. The slump deepened after a German report showed that manufacturing in Europe’s biggest economy and Hungary’s biggest export market expanded less than analysts projected. Yields fell at a Hungarian debt sale on the expectation the central bank in Budapest will reduce interest rates further to kickstart economic growth.

“The Fed minutes spoiled sentiment on markets,” Imre Kerekgyarto and Karoly Bamli, Budapest-based traders at Commerzbank AG, wrote in an e-mail today. “The downturn in markets began to be reflected in the forint this morning.”

The forint slid 0.4 percent to 292.4 per euro by 2 p.m. in Budapest, the biggest decline among more than 20 emerging market currencies following the Czech koruna.

The Debt Management Agency raised 48 billion forint ($217 million) in notes maturing in 2016, 2018 and 2028, 5 billion forint more than planned, at an auction today, according to data from the agency on Bloomberg. The sale included 25 billion forint in three-year bonds at an average yield of 5.31 percent, compared with 5.46 percent at the last sale of that maturity two weeks ago.

Fed Liquidity

Yields on existing three-year bonds rose five basis points, or 0.05 percentage point, to 5.423 percent today.

Several Fed policy makers said the central bank should be ready to vary the pace of its $85 billion of monthly bond purchases, according to minutes of the meeting released yesterday.

The forint jumped 8.1 percent last year, the second-biggest advance among more than 100 currencies tracked by Bloomberg after the Polish zloty, helped by liquidity from Fed bond purchases channeled toward riskier assets.

Markit Economics said its index of German manufacturing based on a survey of purchasing managers was 50.1 this month compared with 49.8 in January. Economists surveyed by Bloomberg forecast the gauge would increase to 50.5. A reading above 50 signals expansion.

Traders added to bets on Hungarian monetary easing and yields declined after reports showed on Feb. 14 gross domestic product slumped the most in three years in the fourth quarter and inflation slowed in January. The central bank, which cut rates to a two-year low of 5.5 percent in January from 7 percent in July, will deliver a further 25 basis-point cut on Feb. 26, according to all 17 economists surveyed by Bloomberg.

“The short end of the curve is stronger because of the impending rate cut,” Krisztian Toth, a Budapest-based fixed income trader at BNP Paribas SA, wrote in e-mailed comments to Bloomberg on the auction.

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