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Central European Daily

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Hungarian central bank pledges to defend forint

Wed, Oct 22 2008, 07:33 GMT
by KBC Market Research Desk

KBC Bank

Headlines

Currencies: Hungarian central bank pledges to defend forint
Fixed Income: Czech Finance Ministry tries to offer 8-year floater

Currencies

The Polish zloty slipped to fresh year-long lows against both the euro and dollar as rising risk aversion fueled flows back into the greenback and contagion from the sliding forint continued to weigh heavily on the sentiment in a local perspective. In such circumstances the EUR/PLN had no trouble in making the move past 3.60 and is now testing bids in the 3.70 area. No technical or psychological resistance level seems strong enough for the pair in the current conditions as currency markets in the region remain vulnerable. Further depreciation is a likely scenario in the foreseeable future.

The sell off on the Hungarian forint and the sharp gains of US dollar hit the Czech koruna. Hence the pair moved up quite sharply as far as 25.65 EUR/CZK. We believe that also today the Czech FX market should stay in the negative territory. The situation in Hungary does not seem to stabilise, despite some relief on the global inter- bank money markets. Beside that the US dollar continues to trade very strong and that may weigh on the region as well. From a technical point of view , the koruna has confirmed the break through above 200-day moving average. We see the next technical stop at 25.85 EUR/CZK.

The Hungarian forint depreciation accelerated on Tuesday and overnight, the EUR/HUF pair slipped through 280 and hit 282 early in the morning. The 280 level is seen as an important threshold for real money investors, weakening beyond this could trigger stop-loss orders on the bond and stock market. Thereby we see a growing chance that central bank may execute an extraordinary hike today and/or FX market intervention. Local people have also started to worry about the currency’s level, which could also be a strong argument for the central bank to step in. The major risk in any currency crisis is to have local players convert their deposits into foreign currencies. Hedge funds are reported to stand behind the forint’s weakening as they are looking for countries with macro vulnerabilities and Hungary was an obvious target for this. To handle this, authorities should act firmly and ask foreign help, like the IMF or the EU/ECB to break the current trend. The 285.00 level is the all-time record from the 2006 crisis and the market may try to test it soon, but we still think that current weakness could trigger central bank reaction that could help for at least the short-term.

The Slovak koruna was relatively stable neglecting the sharp losses in other CEE currencies. The economic calendar is empty today; a government meeting is the only scheduled event. EUR/SKK is still around the level of 30.48. We expect the stronger dollar will affect the local currency this time, but do not think that another spike to the 30.75 level like several days ago will occur.

Fixed income

Polish bonds had one of the worst sessions in quite some time yesterday with yields up by 25 bps in extremely tight liquidity conditions. The long end of the curve was again hardest hit as the curve continued to steepen in the flight to the safe haven dollar. In the longer term we have no doubt that the move will be reversed, however, the short run outlook is likely to remain precarious until confidence returns to markets. This remains a distant prospect though and investors are likely to continue ignoring the economic fundamentals, which also favour a steeper bond curve, but at considerably lower yields levels.

The Czech bond market remained frozen yesterday, but today the situation might change. The finance ministry will issue 8-year floating-rate bond. We believe that due to the fact that this auction is the single long-term debt auction in the near future, there can be solid demand. Nevertheless the question is what will be the pricing and which bids the FinMin will be ready to accept. We believe that Finance Ministry won’t accept all bids and thus the whole offered amount will be hardly sold

The Hungarian bond market is under selling pressure again as the currency is sliding and 10-year yield has increased to above the key 10.00% level. Situation is following the currency market closely, while turnover will likely fall to a low level again today as market makers could capitulate again to avoid further losses.

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Published on  Wed, Oct 22 2008, 11:37 GMT