January 19, 2018 / 12:12 PM / in a year

CEE MARKETS-Forint leads FX retreat, Hungarian bond yields higher

    * Currencies retreat after hitting multi-year highs vs
    * Disappointment over Hungarian IRS tender causes jitters
    * Hungary trying to push down borrowing costs

    By Sandor Peto
    BUDAPEST, Jan 19 (Reuters) - The forint led a weakening of
Central European currencies on Friday after their surge to
multi-year highs against the dollar made the greenback more
attractive for investors.
    The dollar is labouring near a three-year low against a
basket of global currencies, partly pressured by fears of a
possible U.S. government shutdown. The Senate has yet to approve
a bill that would fund government operations through to Feb. 16.
    The Hungarian currency and bond market were also hit by
disappointment that the central bank's (NBH) long-term interest
rate swap (IRS) tender on Thursday had featured a smaller volume
and at a lower discount than banks had expected..
    Hungarian government bond yields have declined in recent
months to record lows in anticipation that new bi-weekly tenders
and an NBH mortgage scheme would push long-term market interest
rates down, with the aim of stimulating mortgage lending.
    The benchmark 10-year bond yield jumped about 10 basis
points after the IRS auction and was trading flat at 2.08
percent on Friday.
    A Budapest-based fixed income trader said a jump in IRS
yields in the market on Thursday triggered some spot debt
    The NBH may consider now lifting the IRS programme's 300
billion forint limit for the first quarter and offering the
swaps more cheaply, market participants said.
    The European Central Bank, which meets next week, may
continue to keep its policy accommodative, supporting the
Hungarian central bank's loose stance, but a rise in interest
rates is a global trend, said Erste analyst Orsolya Nyeste.
    "If the NBH want to keep yields down, it needs to be present
actively in the market," she said.
    The NBH said on Friday it planned to use the IRS facility
evenly for a long period of time, "with the pricing conditions
revealed at the first auction (on Thursday) nearly unchanged".

    The less aggressive than expected IRS tender contributed to
an overnight surge in the forint to a 3-month high of
307.7 against the euro in illiquid international trade.
    After that spike the forint turned into a regional
underperformer on Friday against both the euro and the dollar.
    Other Central European currencies also eased on Friday, with
the Polish zloty retreating from its three-year highs
against the dollar and the Czech crown off its former
record high against the greenback.
    The forint shed 0.4 percent versus the euro by
1047 GMT, trading at 309.2 and the Czech crown was
down a quarter of a percentage point. The zloty and
the leu shed 0.2 percent against the single currency.
    All four units are still slightly above their end-2017
levels despite diverging monetary policies in the region. 
    Hungary continues to stimulate the economy via
unconventional tools and some Polish central bankers have
projected no change in record-low rates throughout this year.
    Romania's central bank delivered its first rate hike in a
decade earlier this month.
    The Czech central bank (CNB) may deliver its third hike
since August at its February meeting. A member of its board,
Tomas Nidetzky was quoted as saying on Friday that two hikes
this year could be sufficient. 
            CEE       SNAPSHOT   AT                         
            MARKETS             1147 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.4240   25.3600    -0.25%    +0.46%
 crown      >                                       
 Hungary    <EURHUF=  309.2000  307.9500    -0.40%    +0.55%
 forint     >                                       
 Polish     <EURPLN=    4.1740    4.1652    -0.21%    +0.06%
 zloty      >                                       
 Romanian   <EURRON=    4.6615    4.6520    -0.20%    +0.39%
 leu        >                                       
 Croatian   <EURHRK=    7.4380    7.4400    +0.03%    -0.10%
 kuna       >                                       
 Serbian    <EURRSD=  118.4000  118.4300    +0.03%    +0.08%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1121.47  1119.050    +0.22%    +4.02%
 Budapest             39827.95  39663.92    +0.41%    +1.14%
 Warsaw                2599.73   2591.22    +0.33%    +5.63%
 Bucharest             8361.45   8374.67    -0.16%    +7.84%
 Ljubljana  <.SBITOP    833.30    831.33    +0.24%    +3.34%
 Zagreb                1873.30   1873.87    -0.03%    +1.65%
 Belgrade   <.BELEX1    774.64    773.33    +0.17%    +1.95%
 Sofia                  708.71    711.20    -0.35%    +4.61%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    0.7560    0.1620   +134bps    +16bps
   5-year   <CZ5YT=R    1.0030   -0.0260   +113bps     -3bps
   10-year  <CZ10YT=    1.7660   -0.0030   +118bps     -2bps
   2-year   <PL2YT=R    1.5830   -0.0010   +217bps     +0bps
   5-year   <PL5YT=R    2.6490   -0.0080   +277bps     -1bps
   10-year  <PL10YT=    3.3350    0.0050   +275bps     -1bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                1.03      1.20      1.37      0.77
 Hungary                  0.10      0.17      0.25      0.02
 Poland                   1.75      1.77      1.87      1.72
 Note: FRA  are for ask prices                              
 (Additional reporting by Robert Muller in Prague/Marcin Goettig
in Warsaw; Editing by Gareth Jones)
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