Forint Comes Under Friendly Fire From Hungary's Rate-Cut Zeal

  • Forint is biggest decliner in emerging markets this week
  • Government 3-year yields trading close to record low

The forint led declines among emerging-market currencies and Hungarian government bonds rallied to the highest in a month as investors guessed at the depth of future interest-rate cuts after the central bank’s surprise reduction on Tuesday.

The forint weakened 0.6 percent to 313.45 per euro by 4:57 p.m. in Budapest, extending its slide this week to 1.1 percent, the biggest decliner in the period among 24 emerging-market currencies tracked by Bloomberg. The yield on the nation’s benchmark three-year government bond fell seven basis points to 1.59 percent, two basis points short of a record low.

Rate setters haven’t decided how long or deep the new cycle will be and it was their plan to surprise traders by lowering borrowing costs, Deputy Governor Marton Nagy told reporters Wednesday. The National Bank of Hungary cut the interest it pays on three-month deposits by 15 basis points to 1.2 percent on Tuesday, rebutting bets by 18 of 19 economists expecting unchanged rates in a Bloomberg survey.

"The central bank succeeded in surprising the market," said Gabor Nemeth, a money manager who helps oversee about 2.25 billion euro ($2.5 billion) at Aegon NV’s Hungarian fund unit. "We don’t know how deep they will cut and that adds to the impact."

Nemeth said he’s adding to his already overweight exposure in Hungarian bonds, with a preference for longer maturities, as he prepares for a possible wave of inflows into the country’s debt.

Hungary’s local-currency debt has handed investors a 3.5 percent return this year, outperforming a 1.6 percent gain Poland and Romania. Policy makers in Budapest were the first to follow in the footsteps of European Central Bank President Mario Draghi’s stimulus earlier in March, in contrast with more hesitant peers in the European Union’s east.

Hungary’s forint debt outperforms peers

Rate setters are easing policy to help achieve a 3-percent inflation target after the central bank cut its forecast for price growth this year to 0.3 percent from 1.7 percent. Gains this year in the forint have contributed to the pace of price growth missing the target, Nagy said earlier this month.

"Monetary easing is implemented not only because of the inflation target, but because FX weakening and its expected positive impact on growth is another objective," said Nicolaie Alexandru-Chidesciuc, an analyst at JPMorgan Chase & Co. in London. He predicts the deposit rate will be reduced to 0.5 percent compared with an earlier forecast of 1 percent.

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