Hungary Recession Spurs Rate Cut Bets Causing Decline in Forint

For the first time in last 7 days, the major currency of Hungary, Forint experienced a drop and the yields also went down to a three-year low value. The recession in Hungary deepened further and inflation slowed down, thereby fueling speculation of interest rate cuts.

The Gross Domestic Product of Hungary declined by 2.7% in the 4th quarter from what it was a year earlier, marking the biggest decline in last 3 years. Apart from that, Hungary’s inflation also went down to 3.7%, marking its lowest value since September, 2011. On the other hand, the traders increased on bets on the rate cuts to the highest value in last 30 days.

The analyst of Nordea Bank AB, Annika Lindblad stated that the data is bleak for Hungary and the same increased the expectations of more rate cuts; such a scenario is definitely not helping Forint much. To describe the Gross Domestic Product data of Hungary, Annika Lindblad used a single word and that is dismal.

Forint decreased by 0.8% against Euro and is currently at 292.34 per Euro. Apart from that, it experienced a fall of 1.7% against USD as well. The borrowing costs experienced the biggest decrease since May, 2010 at the auction of 75 billion Forint of the 12-month bills. The decrease is 50% more than what was planned. The statistics was released by the Debt Management Agency. The Magyar Nemzeti Bank, incidentally, has reduced the benchmark interest rate by 1.5 percentage points since last August and the same is now at 5.5%, marking its lowest value in last 2 years.

The forward rate agreements which fix interest in 12 months experienced a decline of 8 basis points and are currently at 4.33%. This marks its lowest intraday level in the last 3 years. The FRA contracts were trading at 112 basis points below the offered rate by the Budapest Interbank, marking its widest spread in a month’s time.

In 2011, Forint actually declined by 11% against Euro, marking its worst performance since 1999, the first time since when the currency has been recorded. That was a result of some of the decisions that Viktor Orban, the Prime Minister of Hungary took such as levying special taxes on the companies, forcing banks to accept losses on the foreign currency loans, nationalizing privately managed pension fund holdings etc.