January 17, 2019 / 3:27 PM / 6 months ago

CEE MARKETS-Forint rallies as Hungarian, Czech rate setters hint at tightening

    * Forint surges further to 5-month high on hawkish comments
    * Czech central banker sees more though slower rate hikes
    * Hungarian, Romanian bond yields jump at auctions

 (Recasts with continuing forint rally, comments from Czech
central bank chief, auctions results)
    By Sandor Peto
    BUDAPEST, Jan 17 (Reuters) - The forint extended gains on
Thursday, rallying to 5-month highs against the euro on comments
from Hungarian central bank (NBH) Deputy Governor Marton Nagy
suggesting that monetary tightening may be near.
    The bank's base rate has been at a record low of 0.9 percent
since 2016, and became Central Europe's lowest rate after
several hikes by the Czech central bank (CNB) since 2017.
    Headline inflation has sharply retreated in the region in
the past months, but the NBH's key core inflation measure
excluding tax effects rose to 2.9 percent in December.
    Nagy said on Wednesday that monetary tightening could start
if the rate reached or exceeded 3 percent, the midpoint of the
bank's target range.
    The comments bolstered the forint by 1.5 percent from
Wednesday's lows to a 5-month high of 319.35 against the euro by
Thursday. Further gains towards 7-month highs at 319 are
possible, dealers said.
    One dealer said the rally might be overdone, though it might
signal a shift into ranges between 319 and 322 from the past
months' typical 321-324 channel.
    "We should not expect a rate hike to come right after core
inflation reaches 3 percent," the dealer said, adding that the
bank was more likely to tighten conditions by cutting the
liquidity from its fx swap tool.
    Market participants said hints at tighter policy supported
the forint, and also the crown which was steady at
25.54 versus the euro, but traded near its strongest levels in 4
    Soft price index figures raised some question marks over
further CNB rate increases.
    But Governor Jiri Rusnok told Czech Radio on Thursday that
"some moderate rise can be assumed", even though the pace "will
be definitely much slower than last year".
    A possible uptick in hedging deals by exporters after a dip
in activity last quarter can also support the crown, CSOB
analysts said in note.
    While Nagy's comments boosted the forint, they added fuel to
an ongoing upwards correction in Hungarian bond yields after a
big decline since October, traders said.
    Yields jumped at the Hungarian and Romanian bond auctions on
Thursday, but demand was high enough to increase Hungary's sale
above the plan at a top-up tender.
    "The yield rise lost steam in the afternoon, but looking at
the momentum, there may be room for some further increase," one
Budapest-based trader said.
            CEE       SNAPSHOT   AT                         
            MARKETS             1523 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2019
 Czech      <EURCZK=   25.5400   25.5410    +0.00%    +0.65%
 crown      >                                       
 Hungary    <EURHUF=  319.4500  321.4000    +0.61%    +0.51%
 forint     >                                       
 Polish     <EURPLN=    4.2845    4.2825    -0.05%    +0.12%
 zloty      >                                       
 Romanian   <EURRON=    4.6930    4.6876    -0.12%    -0.83%
 leu        >                                       
 Croatian   <EURHRK=    7.4280    7.4265    -0.02%    -0.24%
 kuna       >                                       
 Serbian    <EURRSD=  118.3500  118.3000    -0.04%    -0.04%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2019
 Prague                1015.07  1019.000    -0.39%    +2.89%
 Budapest             40973.73  40933.04    +0.10%    +4.69%
 Warsaw                2354.13   2364.17    -0.42%    +3.40%
 Bucharest             7200.63   7077.10    +1.75%    -2.48%
 Ljubljana  <.SBITOP    835.91    827.54    +1.01%    +3.94%
 Zagreb                1756.19   1752.38    +0.22%    +0.42%
 Belgrade   <.BELEX1    697.56    704.25    -0.95%    -8.42%
 Sofia                  566.77    563.49    +0.58%    -4.66%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.8780    0.1120   +248bps    +10bps
   5-year   <CZ5YT=R    1.7730    0.0180   +210bps     +1bps
   10-year  <CZ10YT=    1.8550    0.0180   +162bps     +1bps
   2-year   <PL2YT=R    1.3760   -0.0380   +197bps     -5bps
   5-year   <PL5YT=R    2.2330    0.0330   +256bps     +2bps
   10-year  <PL10YT=    2.8380    0.0580   +261bps     +5bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.15      2.21      2.25      2.01
 Hungary                  0.32      0.59      0.85      0.14
 Poland                   1.73      1.73      1.73      1.72
 Note: FRA  are for ask prices                              
 (Additional reporting by Luiza Ilie in Bucharest and Jason
Hovet in Prague
Editing by Mark Heinrich)
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