Hungary forint shoved to new all-time low vs. EUR (317.65)

Trouble at the neighbour too - 20:19

Slovakia’s assessment has also deteriorated, as the government has accepted no bids from investors at a sale of 5-yr notes today. It had a EUR 150 m lot on offer, but investors were to buy only EUR 13 m of it. Slovakia’s 5-yr CDS spread jumped 28 bps to 268 basis points, producing the largest leap in CDS spreads today. Hungary came in second.

New all-time forint low - 18:41

Sales pressure renewed on the forint market in the evening as global investor sentiment worsened, sending the HUF to a new all-time low vs. the EUR. The forint was quoted as weak as 317.65 against the single European currency.

This means the HUF broke its record (low) reached in March 2009.

HUF major underperformer - 16:53

EUR/HUF visits territory north of 316 - 15:46

Hungary’s forint eased temporarity to above 316.50 versus the euro on the interbank market then it corrected back by one unit. Against the Swiss franc it depreciated to 256 and it eased to 232 to the USD only to regain some strength in both relations.

Gov’t securities yields leap - 14:55

The first day of the weak was not only about a the forint’s weakening, a rise in Hungary’s 5-yr CSD spread by 16 bps (according to Datavision data) and a failed discount T-bill auction. Government securities yields rose substantially too. The yield of the 10-yr benchmark bond went up to 8.64%, which is a 27-month high.

Yields leaped by 30-40 bps today on Hungary’s fixed income market as the forint depreciated, while the yields on Hungary’s USD-denominated bond have hardly changed. While the 10-yr forint instrument saw its yield climb to around 8.5% in the afternoon, the USD bond of the same maturity had a 7% yield. If the market was pricing consistently then based on asset swap and basis swap spreads Hungary’s long-term bond yields should be some 150 bps higher, i.e. around 10%, Gyula Tóth, analyst at UniCredit, told Portfolio.hu.

With regard to the forint’s recent performance and the muted decline in non-residents’ holding of Hungarian government securities Tóth noted that most of the investors likely have their HGB exposure covered in case of marked forint weakening (so this factor should not provide reason for dumping Hungarian debt) and he also believes local punters also braced themselves for a downgrade. According to the latest (last Thursday) figures, the holding of Hungarian government securities by non-residents dropped to HUF 34 bn to HUF 3,797 bn.

As we have noted above, the 10-yr benchmark yield went up to 8.64% today (a rise of 31 bps compared to Friday), which is the highest level since August 2009. The yield of the 3-m discount T-bill is 6.47%, which means the market is pricing a 50-bp rate hike on this horizon.

As you can see on the chart below the holding of Hungarian debt by non-residents was rising as the forint was gaining vs. the EUR until the summer (to around 260). Then while their holdings grew further the HUF depreciated to around 275.

In mid-Sep the non-residents’ holding of local debt rose to a new all-time high (slightly above HUF 4,000 bn), but the forint has been easing in a trendlike fashion since the announcement of the early repayment scheme in early September. Until now this process was unfazed, but while the HUF eased by almost 20% non-residents’ holdings ebbed very moderately to HUF 3,800 bn.

HUF is the biggest loser today - 13:47

Hungary’s forint was the world’s worst-performing currency today, trading down 1.3% to 314.90 per euro as of 11:16 a.m. in Budapest, Bloomberg reported. The yield on government notes due in 2017 surged 32 basis points, or 0.32 percentage point, to 8.474%. The HUF is currenty quoted at 315.75 vs. the EUR, which marks yet a new 2.5-yr low.

Yields jump, mkt prices rate hike - 11:01

Parallel with the forint’s easing in the morning, yields on Hungary’s government securities market jumped 15-20 basis points. Around 10:30 CET the yield of the 3-yr benchmark bond was around 8.10%, that of the 5-yr instrument at around 8.40% and that of the 10-yr bond around 8.50%. A London-based FI dealer noted that these yields are a clear indication that the market is pricing Hungary as if it were in junk grade already. A broker told Portfolio.hu that the 5-yr CDS spread is around 580 bps, the same level as the 2.5-yr record reached last week.
The fact that the yield of shorter debt instruments is considerably above the central bank’s (NBH) 6.00% base rate is a clear sign that the market is pricing a rate hike in Hungary. Based on forward rate agreements the market is pricing a 75-100 monetary tightening for the next 3-6 months.

Meanwhile abroad... - 10:32

The forint shed more than four units versus the euro since opening, although global investor sentiment would not justify such a weakening. European stock indices have started to slip only in the past few minutes; the key stock exchanges show a mixed performance. Meanwhile, the euro has eased slightly versus the US dollar; EUR/USD is currently teetering at the 1.37 level.

New low - 10:15

The forint reached a new record low at 315.52 versus the euro on Monday morning, beating the previous local record hit last Thursday at 315.42. The forint is a few inches away from its all-time low (317) reached in March 2009.

The forint's easing is spectacular also against the Swiss franc: CHF/HUF is above 255 already (42% above the discount rate of 180 used in the early repayment scheme).

EUR/HUF north of 315 - 09:53

Hungary’s forint started to ease markedly after 09:00 CET. The HUF is currently quoted north of 315, a new 2.5-year low for the forint after a local negative record set last Thursday.
The forint’s depreciation may be linked to the central bank’s (NBH) latest statistics, which carries two negative messages.

HUF 256 bn required by banks for early repayment scheme - 09:37

The NBH announced today that at its weekly euro sale tenders launched on 3 October for commercial banks needing funds for the early repayment scheme of foreign currency mortgages it has accepted EUR 890 m worth of bids (HUF 262 bn) and paid EUR 235 m (HUF 69 bn) by the end of October. The latter sum reduced the liquidity in the banking system.

The EUR 890 m worth of euro demand by commercial banks indicate a high interest in participation in the FX debt fix programme, as it means that borrowers registered to repay about 5% of the HUF 5,300 bn outstanding FX mortgage debt by end-Oct, although the NBH paid out only HUF 69 bn worth of euros by then.

This is bad news for financial stability and foreshadows massive losses to be suffered by banks on the difference between the discount early repayment and actual market rates. This gap was as wide as 25-30% in October, but has widened to around 40% in case of the Swiss franc.

The statistics not only indicates a high euro demand by the banks, but also tells us that the marked decline in international reserves last month had little to do with the central bank’s euro funding. Therefore we do not really know what played the main role in the cc. EUR 700 m drop in the reserves. Although there are a number of factors that could have contributed to this decrease, today’s numbers underpin the assumption that the central bank attempted to dampen the forint’s sharp depreciation in October by interventions.Hungary edges closer to junk grade - Where is the forint headed? - 08:30

While global investor sentiment is bubbly, the outlook on Hungary has deteriorated, which foreshadows a polarised trading day. The buoyant external mood, however, is likely to grow on the HUF in early trading.

The HUF opened Monday’s session at 311 versus the euro, somewhat weaker than its Friday close, when it managed to appreciate despite Fitch’s move (lowering the outlook on Hungary’s credit rating to negative from stable).

Today the market may price in S&P’s action too (placing Hungary in CreditWatch with negative implications), which is an even stronger indication for an imminent downgrade. But the impact could be dampened by good news from the European debt crisis turned political crises (new governments in Italy, Greece).But EUR/HUF at 311 is not exactly beneficial for the Swiss franc’s exchange rate. While the CHF depreciate some to the EUR over the past few days, the weakness of the forint keeps CHF/HUF at above 250.

The looming downgrade will exert the most significant impact on the fixed income market, but it is unlikely that the forint’s recent underperformance will be corrected in the short term. It is noteworthy that since the EU summit Hungary’s forint eased by more than 5% against its “sister currency", Poland’s zloty.

There is no key macro data in the pipeline for today either locally or abroad, which means investors will be reacting mostly to domestic political news from Italy and the first remarks made by the technocrat cabinet.

Economist Mario Monti, 68, Former European Union Competition Commissioner, was offered the post of Prime Minister by President Giorgio Napolitano last night in Rome, less than 24 hours after PM Silvio Berlusconi resigned. Monti, who did his graduate work in economics at Yale University, spent almost a decade in Brussels as EU commissioner and has been running the Bocconi University in Milan, the country's top business school, since 1994.

Greek Prime Minister George Papandreou resigned last week to make way for a coalition led by European Central Bank (ECB) Vice President Lucas Papademos.

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