Forint hits six-week-low, Evergrande crisis hammers stocks

BUDAPEST: Hungary's forint fell to a six-week-low ahead of Tuesday's pivotal central bank meeting, while regional stock markets were hammered as China Evergrande's debt crisis curbed appetite for riskier assets.

At 0808 GMT, the forint traded 0.1% lower, recovering from an earlier fall of around 0.2%. The Czech crown, which like the forint has benefited so far from central bank rate tightening, was down 0.13% in early trade.

"The general negative (market) sentiment has lifted the EURHUF exchange rate to the 50-day and 100-day moving averages in a much more substantial move than seen in the Czech crown and the Polish zloty," brokerage Erste Investment said in a note.

"These levels could halt the forint's losses for the time being."

Regional stock markets were all in the red, as Warsaw stocks led losses with a 2.3% drop.

The forint and the crown still dominated the region with gains of some 3% each for the year, as central banks in Budapest and Prague started raising rates in June to combat growing inflation pressure in the aftermath of the pandemic.

Hungary's central bank meets on Tuesday to discuss interest rates amid high uncertainty over the size of its next rate move, following a combined 90 basis points worth of hikes in its base rate over the past three months to 1.5%.

Economists polled by Reuters expect the bank to raise its base rate by 25 basis points to 1.75% on Tuesday. However, forecasts for the move project four possible outcomes - a 15 basis-point, a 20 basis-point, a 25 basis-point and a 30 basis-point increase.

A currency dealer in Budapest said the Evergrande debt crisis could also complicate Tuesday's decision as the weakness of the forint would justify tighter policy, while a possibly shakier world economy could support the case for continuing quantitative easing.

"Even though the cycle of rate hikes is set to continue, probably with smaller steps, their precise size is unclear," Erste Group said in a note.

"Moreover, it will be interesting to see the new inflation and growth forecasts of the national bank, which may offer further insight into the planned course for the near future."

The zloty, which has underperformed the crown and the forint in the past months over the Polish central bank's dovish stance on inflation, eased 0.2% and could face further pressure from a key court decision due later this week.

"The ruling of the Constitutional Court scheduled for this week (Wednesday), which will decide on the primacy of Polish law over EU law, remains a source of uncertainty," Bank Millennium said in a note.

"Until then, we expect continued increased pressure on the zloty."