Hungary central bank pumps euros into interbank market via swaps in forint supportive move

BUDAPEST: Hungary's central bank pumped 575 million euros worth of euro liquidity into the domestic interbank market at its first new fx swap tender on Friday, in a move that analysts said was aimed at supporting the forint.

The forint and Czech crown have led losses among central European currencies this week with Hungary and the Czech Republic reporting record numbers of new coronavirus infections. Worsening economic prospects and high inflation has also been weighing on the forint.

The National Bank of Hungary (NBH), which will decide on interest rates on Tuesday, announced on Sept. 8 that it would add the euro swap tenders to its monetary policy toolkit in order to reduce volatility in the domestic fx swap market.

By providing euros for banks via the fx swaps, the NBH can ease selling pressure on the forint on the spot market.

The bank said in a statement on Friday that it would hold another euro liquidity swap tender on Sept. 25, while it will not hold any forint liquidity swap tenders until Oct. 5. The bank has used forint swap tenders to inject forint liquidity into the market.

Eszter Gargyan, an analyst at Citigroup said that towards the end of the quarter, there is usually a temporary shortage of fx liquidity on the interbank market, which sends implied forint swap yields lower, making it cheap to short the forint.

"The new fx swaps serve as a protection for the forint to prevent it weakening due to end-of-quarter positions closings of banks," said Gargyan.

"This is a kind of temporary intervention for two weeks, without the central bank burning its fx reserves."

The forint hit a record low of 369.54 to the euro on April 1 during the first wave of the coronvirus pandemic. On Friday it traded at 360.35 at 1358 GMT.

The central bank will publish new economic forecasts on Tuesday, including a likely sharp downgrade to its 2020 GDP outlook.