June 19, 2018 / 9:54 AM / a month ago

CEE MARKETS-Forint approaches record low, central bank doves tested

    * Forint touches new 3-year low vs EUR, heading towards
record low
    * Hungarian cbank seen holding rates, may soften dovish
rhetoric
    * Hungary cbank under pressure to clarify goals - analysts
    * Polish output growth slowdown seen not affecting central
bank

    By Sandor Peto
    BUDAPEST, June 19 (Reuters) - The forint edged towards
record lows, staying under pressure before the Hungarian central
bank's (NBH) meeting on Tuesday as investors questioned the
bank's policy targets.
    The bank is expected to announce at 1200 GMT that it will
keep rates on hold, but may shift to less dovish rhetoric in its
statement due at 1300 GMT, market participants and analysts have
said.
    The NBH, one of the world's most dovish central banks, has
pledged to maintain loose policy even as the Federal Reserve
continues to lift its interest rates and the European Central
Bank is seen ending its asset buying programme this year.
    Last year the Hungarian bank added a new target, aiming to
keep long-term government debt yields relatively low, a goal
which led to a slump in the yields to record lows early this
year.
    But a rally of the dollar and U.S. yields sent Hungarian
long-term bond yields surging, wiping out the NBH target, while
a rise in inflation across Central Europe also raised questions
concerning the bank's key goal: inflation.
    The dollar's rally caused a sell-off in emerging
markets in the past two months, and in Central Europe Hungary's
relatively expensive bonds and the forint got the biggest hit.
    The forint touched a new 3-year low against the
euro on Tuesday and traded at 324.46 at 0841 GMT, down 0.1
percent, while the dollar's strength also weakened the zloty
 and the Czech crown, by 0.2 and 0.1 percent,
respectively.
    Hungarian government bond yields rose 5-8 basis points, with
the 10-year paper trading around 3.5 percent.
    Traders said the forint, if it reaches its 2015 record lows
of 327, could head towards 330, which would still not threaten
the NBH's 2-4 percent inflation target.
    But coupled with a likely increase in the bank's quarterly
inflation forecasts on Tuesday and nerves in global markets,
forint weakness may put pressure on the bank to drift away from
its rigid rejection of any monetary tightening, market
participants said.
    "Any hawkish comments by the Hungarian central bank could
lead to sharp reversal in positioning and thus, to positive HUF
returns in the short-term," Vienna-based Raiffeisen analyst
Sebastian Petric said in a note.
    "Vice versa, a continuation of the loose monetary conditions
in Hungary would lead to a disappointment in the market," he
added.
    One Budapest-based trader said a move away from the NBH's
dovish rhetoric could lead to some short-term forint rebound.
    "That would be an opportunity to buy the euro... Things will
not turn better locally until global markets calm down," the
trader said.
    Hungary's loose monetary policy stands in contrast with
tightening in the Czech Republic, Petric said.
    The Polish central bank (NBP) has also pledged to keep rates
on hold for years, but it does not have a target for long-term
yields.
    Polish figures releases showed a slowdown in annual
industrial output in May to 5.4 percent, but are unlikely to
"affect the MPC's (central bank's) optics," said Monika Kurtek,
chief economist at Bank Pocztowy. 
            CEE       SNAPSHOT   AT  1041                       
            MARKETS             CET                     
                      CURRENCI                                  
                      ES                                
                      Latest    Previous      Daily     Change
                      bid       close         change    in 2018
 Czech      <EURCZK=   25.8080  25.776         -0.12      -1.03%
 crown      >                                           
 Hungary    <EURHUF=  324.4600      324.1000    -0.11%    -4.17%
 forint     >                                           
 Polish     <EURPLN=    4.3098  4.3018         -0.19      -3.10%
 zloty      >                                           
 Romanian   <EURRON=    4.6665        4.6680    +0.03%    +0.28%
 leu        >                                           
 Croatian   <EURHRK=    7.3830        7.3790    -0.05%    +0.64%
 kuna       >                                           
 Serbian    <EURRSD=  117.9500      118.0700    +0.10%    +0.47%
 dinar      >                                           
 Note:      calculated from                   1800 CET          
 daily                                                  
 change                                                 
                                                                
                      Latest    Previous      Daily     Change
                                close         change    in 2018
 Prague                1067.79     1069.4000    -0.15%    -0.96%
 Budapest             35112.11      35505.46    -1.11%   -10.83%
 Warsaw                2114.66       2150.98    -1.69%   -14.08%
 Bucharest             8122.31       8163.77    -0.51%    +4.75%
 Ljubljana  <.SBITOP    888.18        888.87    -0.08%   +10.14%
            >                                           
 Zagreb                1812.95       1815.75    -0.15%    -1.62%
 Belgrade   <.BELEX1    730.51        734.98    -0.61%    -3.85%
            5>                                          
 Sofia                  632.19        630.77    +0.23%    -6.68%
                      BONDS                                     
                      Yield     Yield         Spread    Daily
                      (bid)     change        vs Bund   change
                                                        in
 Czech                                                  spread
 Republic                                               
   2-year   <CZ2YT=R    1.0650        0.0710   +173bps     +9bps
            R>                                          
   5-year   <CZ5YT=R    1.5600       -0.0240   +183bps     +1bps
            R>                                          
   10-year  <CZ10YT=    2.1450       -0.0030   +179bps     +4bps
            RR>                                         
 Poland                                                         
   2-year   <PL2YT=R    1.6530        0.0090   +232bps     +3bps
            R>                                          
   5-year   <PL5YT=R    2.5460       -0.0170   +282bps     +2bps
            R>                                          
   10-year  <PL10YT=    3.2310        0.0240   +287bps     +6bps
            RR>                                         
            FORWARD   RATE      AGREEMENT                       
                      3x6       6x9           9x12      3M
                                                        interban
                                                        k
 Czech Rep                1.17          1.29      1.43      0.93
            <PRIBOR=                                    
            >                                           
 Hungary                  0.42          0.62      0.82      0.16
                                                        
 Poland                   1.75          1.76      1.82      1.70
                                                        
 Note: FRA  are for ask prices                                  
 quotes                                                 
 *****************************************************          
 *********                                              
 
 (Additional reporting by Agnieszka Barteczko in Warsaw
Editing by Andrew Heavens)
  
 
 
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