The Hungarian central bank surprised markets slightly with a 25bps rate cut from 7.00% to 6.75%. Although this had been priced in by markets – the 3x6 FRA was trading at 6.50% - it was followed by forint weakening, which could actually backfire to the yields curve and further rate cut expectations. So far, only the currency weakened about 2% and long-dated FRAs, like 9x12 remained unchanged at a low level below 6.00%. That implies that in case the currency weakens more, there could be reaction on the money market and the central bank could just stop the rate cut cycle.
The main argument behind the move was the better risk assessment of local cur-rency assets since the beginning of the year. The CDS spread narrowed from 600 bps to 420 bps, long-term yields dropped from 9.00% to 7.40%.
On the fundamental side, the budget deficit looks to get close to the 2.5% of GDP target and tax-adjusted inflation is around the 3% level. On the other side, the IMF talks will start only later in mid-September and the eurzone crisis may also contain some additional risk, which could have significant impact on the high-beta forint market.