Forint gains a little on interbank market

Market worries concerning ECBʼs intentions weigh on Central European currencies, although turnover was low as investors in London were on holiday, and profit taking helped currencies to climb a little versus the euro from the end of last week, when a sharp retreat of Bunds triggered selling in Central European government bond markets.

However, while the euro lost some ground to the dollar taking heart from a jump in US consumer sentiment and forecast-beating vehicle sales on Friday and US factory orders posting the largest gain in eight months on Monday, and after two Fed policymakers said over the week-end that a June US rate hike was "on the table", confusing analystsʼ September or December call in the wake of more recent, dismal, US data, the Hungarian currency could not profit much from the cross, because first rated euro zone yields continued to rise, pulling Hungarian sovereign yields up, too, on the secondary market. As western yields rose much faster, a relative narrowing of the Hungariansʼ risk premium limited the forintʼs gains on Monday.

Euro zone yields started to rise recently after fresh data eased deflation fears and suggested a pick-up in private sector bank lending after a three-year fall, and continued up on Monday despite soothing words from ECB vice president Vitor Constancio that the bank had no intention of prematurely ending its QE which should last at least until September next year.

On the longer term, Societe Generally said in a note on Monday that Hungaryʼs substantial current-account surplus and a recovery in the EU would benefit the forint.

Hungaryʼs robust current account surplus, together with its strong economic performance, may support the forint, creating room for further, gradual rate cuts without a major blow to the currency, Citigroup also said. The risk of undershooting the 3% inflation target has increased and given that forint lending remains weak, the exchange rate is still the primary channel for monetary policy, Citigroup said in a note.

Morgan Stanley said in a note on Monday that it was optimistic on Hungaryʼs prospects for credit rating upgrades, adding that rating firmsʼ emphasis on the large size of external debt is misplaced. The government-mandated conversion in February of the large stock of foreign-currency household mortgages, which amounted to 11% of GDP, into local-currency, variable-rate loans "has contributed to the fall in external vulnerability, made the monetary policy transmission mechanism more effective and removed a structural anomaly in Hungaryʼs policy framework," Morgan Stanley said. It expects Hungary, currently rated junk by all three major rating firms, to return to investment grade in late 2015 or next year.

The forint traded at 271.96 to the dollar, down from 271.18 late Friday and 271.39 late Sunday. On Monday, it moved between 270.36 and 272.74, a four-day low, after a more than two-month high at 268.96 last Friday intraday.

It was quoted at 290.92 to the Swiss franc, down from 290.82 late Friday and 290.68 late Sunday. Its range on Monday was 289.39 to 291.29. Since its crash to an all-time low at 378.49 on January 15 when the Swiss central bank scrapped its cap of 1.20 to the euro, it reached the highest at 281.07 on February 26.