BUDAPEST/BUCHAREST: Emerging European currencies weakened on Thursday after comments by the US Federal Reserve left markets edgy and the euro fell, with the Hungarian forint hitting a historic low against the Swiss franc.
The euro shed more than 1 percent against the dollar and fell to its lowest ever against the Swiss currency as anxiety about Greece and the pace of US growth hurt investor risk appetite and encouraged safe-haven demand.
Traders said Hungarian bonds eased partly on uncertainty over the market impact of a government move to cancel debt.
Hungarian yields rose 15-20 basis points across the curve from Wednesday. Traders said comments by the Federal Reserve on the US economy had added to negative investor sentiment related to the euro zone debt crisis, while some domestic factors had also weighed.
JPMorgan said on Thursday it recommended cutting exposure to Hungarian bonds because Hungary's plans to use private pension fund assets to cut its debt were likely to lead to a fall in the country's weighting in one of the bank's flagship indices.
"The JP Morgan note was the trigger, locals started to sell then foreigners joined in, then local end-users began to buy at higher yield levels. It's difficult to predict the future, which will mostly depend on Greece and the euro zone," said one trader in Budapest.
He said the next key test of the market would be bond auctions next week after a 12-month T-bill auction today sold at mid-market and with strong demand.
Hungary's benchmark 10-year bond yield, at 7.42 percent, is now back in its 7.2-7.6 percent February-April range, having risen from 6.90-7.20 since April.
"Of course this market is not like the forex market where such support levels are more important, but I think we would need further bad news to push the yield through 7.60 percent," one Budapest-based fixed income trader said.
"Any direction is possible, we get news (from abroad) day by day which we cannot predict."
CZECH RATES ON HOLD
The Czech crown was unfazed by its central bank's widely expected decision to hold rates at a record low of 0.75 percent in the absence of demand-led price pressures and as export-driven recovery looks set to slow.
With markets expecting a European Central Bank rate rise next month, which would widen the rate differential between Prague and the euro zone to 75 basis points, dealers have said the Czechs may feel pressure to tighten policy sooner.
"The EUR/CZK cross has been bid in recent sessions but watch wordings from (the central bank)," SEB said in a note to clients. "If turning into a more hawkish tone the koruna could stage a comeback, bringing the pair back closer towards 24.10."
Danske Bank said that with demand-led inflationary pressure tame, policymakers had no pressing need for a tightening cycle.
"I cannot anticipate what the decision (on rates) will be in six weeks. Data from the real economy show the start of recovery is confirmed, that is a fact," Czech Vice-Governor Vladimir Tomsik said at a news conference following the rate decision.
"The structure of growth at the moment does not show inflationary pressures. But that does not mean that if new information comes in the following days, the start of raising interest rates cannot be shifted (closer to now)."
The forint underperformed the market, losing 0.8 percent, while Romania's leu had eased 0.5 percent by 1410 GMT. The Czech crown lost 0.3 percent, while the Polish zloty was 0.7 percent lower, with Polish local markets closed for a holiday.
The leu was seen having upside potential after recent losses. JP Morgan recommended on Thursday entering short EUR/RON positions at a level of 4.25 per euro, saying economic fundamentals point to a stronger leu, while Greek debt contagion risks to the banking sector were contained.
The Balkan banking system, including Romania, Bulgaria and Serbia, should be able to withstand a gradual withdrawal of credit lines from Greek banks to their subsidiaries, but might need additional help in the event of a a Greek default.
Copyright Reuters, 2011
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