June 21, 2018 / 8:58 AM / a year ago

CEE MARKETS-Hungary's forint approaches all-time low, bond auction eyed

    By Krisztina  Than
    BUDAPEST, June 21 (Reuters) - Hungary's forint fell to a new
3-1/2-year low versus the euro on Thursday, underperforming its
regional peers, as the impact of the central bank's message on
Tuesday flagging an eventual end to its ultra-loose policy was
    Investors will closely watch a biweekly government bond
auction at 0930 GMT, after Hungarian yields had soared in the
past few weeks leading up to the central bank's Tuesday meeting.
    At 0835 GMT, the forint traded 0.6 percent lower at 325.90
against the euro, losing all its gains posted in the wake of
pledge by the National Bank of Hungary to firmly focus on
inflation, while keeping main rates on hold.
    The forint on Thursday approached its all-time low of 327
hit in early 2015.
    The central bank will hold its regular monetary policy
interest rate swap tender later in the day, injecting
liquidity into markets, which is aimed at supporting the local
bond market. 
    "We expect that the NBH will be reluctant to scale down
liquidity injections by FX swaps in the short term in order to
support local bond markets and avoid further rise in interbank
rates hurting borrowers with floating rates," Citibank analysts
said in a note. 
    "Therefore, risks are pointing towards a weaker FX as the
HUF remains an attractive funding currency but a gradual
adjustment in HUF rates may eventually follow if the inflation
outlook moves permanently higher."
    In its fresh inflation report released on Thursday, the
central bank discussed three alternative macroeconomic scenarios
in addition to its baseline expectation, and two out of those
alternative scenarios would require tighter monetary policy.

    The Hungarian bank has been one of the most dovish in
Central Europe, keeping its rates at record lows, while the
Czech and Romanian central banks had already started tightening.
    But on Tuesday the Hungarian bank said loose monetary
conditions could no longer prevail until the end of its policy
horizon, for the first time flagging an end to an era of cheap
    A bond trader in Budapest said he expected sufficient demand
for the bonds at the auction where a new 5-year benchmark will
also be offered by the debt agency.
    Hungary offers a total of 50 billion forints worth of
government bonds at the auction. 
    "It seems that for the time being, in the market the 2-3
year segment had come under selling pressure," he said.
    "The market is testing the central bank."
    Hungary's 10-year bonds were trading at a yield of around
3.46 percent on Wednesday, a far cry from levels of
around 2 percent at the start of the year.
    Some traders and analysts said a large bond expiry due on
June 22 could provide support to the local bond market which has
been under pressure from big supply as the debt agency pushed
issuance in the first half of 2018 to fund a larger than
expected budget deficit. The deficit rose due to a pre-financing
of EU-funded development projects.
            CEE        SNAPSHOT   AT                           
            MARKETS              1035 CET            
                       Latest    Previous  Daily     Change
                       bid       close     change    in 2018
 Czech                  25.9450   25.8510    -0.36%      -1.55%
 Hungary               325.9000  323.8900    -0.62%      -4.60%
 Polish                  4.3271    4.3189    -0.19%      -3.48%
 Romanian                4.6729    4.6720    -0.02%      +0.15%
 Croatian                7.3785    7.3835    +0.07%      +0.70%
 Serbian               118.0200  118.0700    +0.04%      +0.41%
 Note:      calculated from                1800 CET            
                       Latest    Previous  Daily     Change
                                 close     change    in 2018
 Prague                 1071.12  1070.030    +0.10%      -0.65%
 Budapest              35533.28  35383.57    +0.42%      -9.76%
 Warsaw                 2154.25   2154.18    +0.00%     -12.47%
 Bucharest              8129.07   8135.47    -0.08%      +4.84%
 Ljubljana               889.79    882.01    +0.88%     +10.34%
 Zagreb                 1835.58   1831.82    +0.21%      -0.40%
 Belgrade   <.BELEX15    728.06    733.59    -0.75%      -4.18%
 Sofia                   631.70    632.27    -0.09%      -6.75%
                       Yield     Yield     Spread    Daily
                       (bid)     change    vs Bund   change in
 Czech                                               spread
   2-year   <CZ2YT=RR    1.0740    0.0440   +174bps       +4bps
   5-year   <CZ5YT=RR    1.5890    0.0020   +185bps       +0bps
   10-year  <CZ10YT=R    2.1900   -0.0020   +181bps       +0bps
   2-year   <PL2YT=RR    1.6600    0.0090   +232bps       +0bps
   5-year   <PL5YT=RR    2.5230   -0.0080   +279bps       -1bps
   10-year  <PL10YT=R    3.2020    0.0340   +283bps       +3bps
            FORWARD    RATE      AGREEMEN                      
                       3x6       6x9       9x12      3M
 Czech Rep          <      1.17      1.29      1.43  #N/A
 Hungary            <      0.59      0.81      1.01        0.20
 Poland             <      1.74      1.77      1.81        1.70
 Note: FRA  are for ask prices                                 
 (Reporting by Krisztina Than
Editing by Keith Weir)
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